What if we leave the Euro?

Patricia Gabaldón. Professor. IE Business School

19 July 2012

The hypothetical decision to bring back the peseta would not address the real problems currently dragging Spain down, namely its level of competitiveness. All it would do is put off the inevitable, and meantime we have a lot to lose.


As with any kind of decision we have to make in our lives, before embarking on a definitive path we have to consider the pros and cons of the different options and compare the costs and benefits of an alternative economic environment. The option of leaving the euro and returning to our respective currencies, which seemed all but impossible just a few months ago, is now quite feasible. Many alternatives have been broached in economic circles, but let’s take another look at what the single currency actually gives us, and what it would mean for Spain if it were to leave the monetary union.

The main advantage of forming part of a monetary union is the resulting free trade among member countries. The simple idea of sharing the same currency reduces the level of uncertainty surrounding transactions by removing transaction costs for traders. The fundamental premise of the free movement of goods, services, people and capital (although in reality it has not proved quite as efficient as it looked on paper) plays a key role in economic growth driven by trade. The idea of unemployment offset by the need for workers in another part of the EU is difficult to implement but not impossible, and provides an enormous advantage for EU citizens as well as member countries.

The second big advantage of belonging to the Union is clearly the monetary stability it has provided over the last twenty years, because we should not forget that during this time we have enjoyed particularly low rates of interest and inflation under the management of the European Central Bank, which would have been very difficult to achieve with any other travel companions. This has had some very positive effects on Spain, particularly the rise in business investment and the entry of foreign capital investment. Moreover, the principle of EU solidarity has meant that the transfer of funds – structural, social, agricultural, etc., has strengthened social and economic structures and raised Spaniards’ standard of living. All this plus the growth of the Spanish economy on a global scale. Since Spain joined the EEC in 1986, its economy has been modernized and the number of workers and businesses have increased, along with living standards. The downside is that along the way we have lost control of our monetary policy along with the ability to use the exchange rate as a economic policy tool, and our fiscal policies have been subject to spending limits, which may have hindered our growth rate in the years leading up to the crisis.

The return to the peseta would afford greater flexibility to implement competitive devaluations that would adjust currency values to the real situation of our economy. Devaluation would make us more competitive vis-a-vis other countries, placing us in a more advantageous position to effect a probable increase in productivity and bring down unemployment levels. Nevertheless, having our own currency would almost certainly have a negative effect on Spanish trade, given that it would impose the uncertainty of exchange rate fluctuations on cross-border transactions, coupled with a return of all the costs associated with trading in a different currency. If we take this same line of analysis further, we can also see that an increase in country risk would probably result in higher rates of interest, which would have a negative effect both on investors and anyone who has debts that are subject to variable rates of interest. And the fact that Spain would no longer be subject to the strict inflation controls imposed by the ECB would mean that possible external pressures on the currency would more than likely increase the rate of inflation. All this without taking into account a possible flight of capital out of Spain resulting from a lack of confidence in the new currency, or in the process that led to it.

And yet even if this currency control were effective and efficient, it would merely mask the solution to the real problem. The possibility of competitive devaluation is interesting in such an uncertain environment and amid sporadic attacks on the currency of a country, but in our case rather than solving the very real problems of competitiveness, it would simply defer them. The euro has given us much and has brought about deep-rooted change in Spain, but there are still many flanks that need attacking, and although this may not be the environment in which to do it, we cannot just close our eyes and pretend that the problems do not exist. The solution, as has been stated repeatedly in recent times, is more Europe not less. It’s time to look toward the objective, not go back to square one.


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