Leaving the euro would make it worse
The fundamental critique of the euro and the monetary union can be summarised as follows: While different economic developments in each country could be easily compensated for by adjusting the exchange rates of national currencies, the necessary adjustment in euro-area countries would have to be based on tax increases and wage cuts. Since this would overburden many Member States, other euro-area members would be forced to step in and provide financial assistance. Therefore, according to the myth, the re-introduction of the drachma or the lira would be the best and cheapest solution for everyone involved.
Of course the technical aspects of the re-introduction of national currencies remain largely unclear. What should be clear, however, is that the new currencies would depreciate in value very rapidly. Attempting to prevent the likely loss of (parts of) their savings, investors would withdraw their funds from vulnerable Member States immediately and transfer it to more stable countries. This capital flight would trigger ‘the mother of all currency crises’ and plunge the already ailing countries into even greater misery. Germans and Austrians might believe that they would not be affected by the disintegration of the euro area, but their currency (which would still be the euro) would increase in value … and yes, it would worsen the prospects of their own export sector massively. As a result, unemployment in the new (old) hard currency countries would be likely to surge.
It is conveniently overlooked that not only the European economy in general, but also the European financial markets in particular have become considerably more integrated over the last decade. For example, Spanish companies or Greek households obtained loans in euros from German and Austrian banks. This debt would remain denominated in euro, even after a Spanish or Greek exit from the monetary union. After the introduction and subsequent devaluation of their new currencies the debt burden would increase dramatically when measured in the currency of the debtor countries. Thus, loans would be unlikely to be repaid because of the excessive debt burden. But if companies/households or whole EU countries go bust, banks in Vienna or Frankfurt would also face significant write-downs and possibly bankruptcy.
In addition to these direct costs resulting from the re-nationalisation of currencies it is often forgotten that currency crises were occurring in Europe repeatedly before the introduction of the euro. During these events much private wealth such as old-age provisions and other savings was destroyed. Thus, a euro exit is not the ‘best’ and ‘easiest’ solution, neither for the current crisis-stricken countries nor for more stable countries like Germany or Austria.