Abstract
This article provides thoughts and guidelines on how a country could exit from the Economic and Monetary Union (EMU) and its currency the euro. We take the hypothetical exit of Finland as a concrete example. Although there is a way out of the euro for Finland and other member countries, exit would not be easy, nor would its short-term costs be known beforehand with any clear margin. We find the lack of a domestic payments system and uncertainty concerning the redenomination costs to be the biggest risks associated with the cost of Finland’s exit. Still, the costs of Finland’s exit need not be very large, around 10 billion euros in the best-case scenario, but we also acknowledge a very costly scenario for the exit.
Acknowledgments
Authors wish to thank James Galbraith, Laura Jernström, Päivi Leino-Sandberg, Hans-Werner Sinn and several experts who asked not to be named for insightful comments and suggestions. Any errors remaining are the responsibility of the authors. We have not received any financial compensation from any political party or group.
Appendix
European Payment Systems
The joint payment systems were constructed over a period of 15 years. In 2008, TARGET2, a large value payments real-time gross settlement system, was introduced and is now the world’s largest system, with other EU countries and countries outside the EU participating. The single euro payment area (SEPA) was introduced in 2008 and includes the EBA Clearing Euro 1 and EBA Clearing STEP 2 payment clearing systems. The former is an older large value system, and the new STEP 2 is a retail payments system. The SEPA area already serves over 500 million inhabitants and is the largest mass payment system in the world. STEP 2 has been developed further; in 2014, it also introduced e-payments and is planning a mobile payment system for autumn 2017. Most EU countries, as well as non-EU countries, e.g. Norway and Switzerland, participate in SEPA.
The newest system is TARGET2-Securities, which is managed by the ECB. This system began in 2014 and operates the post-trading activities of securities trading. The participant is CSD:s (central securities depositories). The number of participants is increasing gradually and includes EU countries and countries outside the EU (for euro payments trades).
These systems have functioned reliably and are efficient. No systemic risks have occurred. All of these systems are gradually adopting the newest technologies and are highly competitive on a global scale. Many euro countries still operate purely domestic payment systems, typically for local (small) banking groups, but their role is diminishing because the EBA Clearing STEP 2 is a more efficient and less costly system. Finland was among the first countries to integrate almost totally into the euro payment systems. When SEPA began, the Finnish retail system (PMJ) continued to function until it was finished in 2014, and local banks used PMJ until 2014. Finland still has a large value payment system (POPS), but it will probably be gradually phased out. In Finland, a new mobile payment system was introduced in March of this year that is expected to grow in popularity, as has happened in Sweden.
In the case of an exit from the euro system, every euro country operating only under them would have large and challenging problems, as new domestic payment, clearing and settlement systems would have to be rebuilt. This would require 1–2 years, and in the meantime, temporary solutions would have to be created, in particular in the case of a unilateral exit from the euro. However, if the whole euro system collapsed, some transition period would likely be agreed upon for the transfer to the new currency systems of member countries; otherwise, the situation would be a catastrophe for Europe and the wider world.
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