A Euro Time-bomb Ticking

Brexit has been dominant topic of conversation surrounding the EU in recent months, but I read a rather interesting article this morning that hints at a bigger problem, especially in the context of Greece’s latest bailout negotiations and the troubled Italian banking system.

Mario Draghi, head of the European Central Bank commented recently on the liabilities that would become payable on any departure from the Euro, and this was picked up by the POLITICO news site. “If a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full,” Draghi said in a letter to two members of the European Parliament published by the ECB late on Friday. He was referring specifically to claims and liabilities of the so-called target2 system, used to settle cross-border transaction within the eurozone.

For instance, Italy would have to pay the biggest amount if it opted to leave the common currency, ECB data reflecting end-November balances show. It would have to transfer €358.6 billion, or about 22 percent of its GDP. Greece would have to pay €71.8 billion, just over 40 percent of its GDP. Germany could claim €754.1 billion, almost a quarter of its 2015 economic output.  So bluntly Italy and Greece are stuck in a long cycle of structural adjustment and austerity, whether their citizens like it or not, as they cannot afford to buy themselves out of the Euro.  I doubt this will end well.


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