The following is an excerpt from Edward Hadas | May 24, 2012 | Slate.com |
Companies are broken up when managers think the whole is worth less than the sum of the parts. Smaller enterprises are more flexible, they say, than incompatible organisations artificially joined into a single, excessively bureaucratic entity. Investors often agree and share prices commonly rise on rumours of a split. The euro is clearly different. The fear of a break-up is making the single currency fall.
The market’s vote in favour of the euro is usually portrayed as its equivalent inverse – a vote against the woes which would accompany a retrograde transition to national currencies. Yes, the euro has dropped from $1.32 to $1.25 since the beginning of May because a messy Greek exit would cause all sorts of grief, even for the stronger members. A recession would be unavoidable, just as after the bankruptcy of Lehman Brothers in 2008. Yet while that dire forecast may be justified, it is itself a tribute to the benefits of cross-border integration within the euro zone. The financial ties have are so tight that breaking them would cause a great deal of trouble.
The market’s judgment would probably be the same even if traders believed that a euro split could be managed without much additional financial stress. A currency demerger would reverse significant economies of scale. With floating exchange rates, companies will….
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