Exiting EMU: the Legal, the Likely And the Ludicrous

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• Budgetary strains in peripheral Europe have invited speculation that a country could withdraw or be expelled from the Euro area.

• Withdrawal from the EU appears possible under the Lisbon Treaty. The treaty does not address explicitly withdrawal from EMU only, or expulsion from EU/EMU.

• Base case: neither withdrawal nor expulsion will occur, since such an outcome is in no party’s interest. The costs are so high that a divorce recommendation should be considered ludicrous.

• Worst case: withdrawal in two to five years, 10% – 20% EUR depreciation, checked by eventual G-3 intervention.

ENDS