Here is part of a great blog post from Gavyn Davies of the FT. He looks at various options that face the euro countries with a potential break up of the euro currency. As he said “This movie cannot now be run backwards” which would mean the re-introduction of national currencies in a parity grid similar to the ERM.
His options include:
Route 1 – The smaller nations leave the euro. It becomes a currency based on the strength of the German and French economies. This smaller version rises sharply
Route 2 – Germany and other bigger nations leave the eurzone because of the inflationary concern. This sub-group would introduce their own currency.
Route 2a – Remaining members (non-German group) of the eurozone would struggle to maintain a euro currency and would introduce their own.
Route 2b – The non-German group would retain the euro but it would be devalued against the US$ and the new currecny of the sub-group.
Route 3 – Adopt fiscal union in the eurozone and increase financial support for bond markets. This would instill greater confidence in the currency.
A messy breakup of the euro could result in a severe recession and it might take 4-5 years for the area to recover.