The Euro – ?You Can Check Out? But You Can Never Leave?


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With the Euro so much in the news at the moment and concerns about its future, I thought it would be helpful to discuss a very interesting research note which was published by the Swi

With the Euro so much in the news at the moment and concerns about its future, I thought it would be helpful to discuss a very interesting research note which was published by the Swiss bank, UBS in September. It was written by their leading European economist and generated quite a lot of interest amongst market commentators. The note highlighted the extreme difficulty and expense that would be involved should a country wish to leave the EU, something that is often overlooked by the majority of articles written on this popular topic.

One of the most pertinent points raised by UBS was that legally there is no provision in the governing treaties of the EU for any Member State to opt-out, or be kicked out, of the EU. This is a fact which is surprisingly seldom mentioned in the media. The note states: ?The Treaties governing the Euro at the moment were designed so as not to have an exit option.? It also adds: ?The result is Hotel California: you can check out ? but you can never leave.?

Essentially there are three main reasons why the founders of the Euro did this:

1. Any opt-out clause would have been seen as a lack of commitment by the Member States.

2. The ability to opt-out would increase the likelihood of it occurring.

3. By not making any technical provision for an exit from the EU, the costs of exit are therefore significantly increased.

Point 3 above might at first seem somewhat of a contradiction so let me explain it a bit further. For a country to either leave or be expelled from the EU it would require a change to the existing treaties and that itself would require unanimous consent from all 27 countries, some of who would require a referendum on the issue. Recent experience of EU leaders making unanimous decisions would suggest that this would be quite a lengthy process! Should that process ever be instigated, one of the major issues this would present is that the country in question would then be in a state of limbo; bound by the EU rules until they depart, but at the mercy of investors reacting to the prospect of an exit and withdrawing funds en masse. The resulting chaos, prior to that country even officially leaving the Euro, would inflict considerable economic and social damage, and then you have the post-Euro consequences to contend with.

It is often written how a country leaving the EU, and adopting its own currency, would be able to grow its way out of debt through having the advantage of a devalued currency ? basis being that their exports would be cheaper for foreign buyers and therefore increase the demand for them. The UBS paper addresses this and goes on to say:

?The idea that a seceding state would immediately have a competitive advantage through devaluing the new national currency (NNC) against the Euro is not likely to hold in reality. The rest of the Euro area (indeed the rest of the European Union) is unlikely to regard secession with tranquil indifference. In the event that a NNC were to depreciate 60% against the Euro, it seems highly plausible that the Euro area would impose a 60% tariff (or even higher) against the exports of the seceding country. The European Commission explicitly alludes to this issue, saying that if a country was to leave the Euro it would ?compensate? for any undue movement in the NNC. It is also important to note that exiting the EMU means exiting the EU. This would leave the country departing with no trade agreement with Europe.?

Sure that country would become a cheap holiday destination, but tourists alone won?t be able to pay off the massive domestic debts!

Along with trade implications quoted above, the UBS note lists debt default, domestic banking stresses, political implications and social unrest as some of the other main consequences of leaving the EU. In closing the note states: ?The economic costs of breaking up the Euro are high, and extremely damaging. The political costs of breaking up the Euro, even in part, are too great to quantify in bald cash terms.?

There are so many complex issues, legal hurdles and significant costs involved for a country to leave the EU that it is highly unlikely that it will ever occur. It is widely recognised that the current structure of the EU needs to change and hopefully lessons will be learnt from this current situation will make the EU a more stable and efficient union in the future.

And to end on a lighter note, soon there will be a new euro coin issued to commemorate 10 years of euro banknotes and coins. The winning design, by an employee of the Austrian Mint, can be viewed at Something to keep an eye out for!

By Bill Blevins, Managaing Director, Blevins Franks

5th October 2011

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