City comment: Greece quitting the euro is no tragedy

That Greece will leave the eurozone is now an odds-on bet. In the European capitals a Plan B is being readied to create a firewall which would try to prevent this leading to a break-up of the eurozone altogether. The official view, articulated by Germany’s Finance Minister Wolfgang Schäuble last week, is that the eurozone could cope were this to happen.

His statement came in the wake of a Bloomberg opinion poll showing that a majority of professionals involved in finance now expected Greece to leave by the end of this year.

We have moved — in the space of a few months — from an outcome that was either unthinkable or at least most unlikely, to something that is deemed both probable and acceptable. It feels rather like the break-up of the Bretton Woods post-war fixed exchange-rate system. A mechanism that was deemed essential to prevent a return to the currency chaos of the inter-war period and therefore must be protected at all costs, resisted the initial challenges but eventually was beaten by inherent weaknesses in its design.

So we have gone beyond “what should happen?” to “what will happen?”, and now to “what will be the mechanism of a break-up?”

The first thing to say is that it has happened before and we tend to forget that the world has a lot of experience of currency unions breaking up.

As well as the end of the Bretton Woods system, we have experienced the break-up of the transferable rouble which was used by the central and eastern European countries in the Soviet empire.

Subsequently, in 1993, we had the Czech Republic split with Slovakia. And we have had Argentina breaking its link with the dollar not to mention the progressive break-up of the sterling area as Commonwealth countries cut their currencies free from the pound.

The trouble is that there is no exact parallel. Perhaps the closest was the break-up of the currency union between Britain and Ireland in 1979, which turned out to be remarkably benign. The Irish Currency Act of 1927 had established a fixed link between the Irish pound and sterling. For more than 50 years the two currencies had been completely interchangeable within Ireland. Ireland printed and minted its own currency but British notes and coins circulated in Ireland alongside Irish ones.

The link was broken by Ireland in March 1979, after Ireland had joined the European exchange rate mechanism and Britain did not. (We joined later, with disastrous results.)

When the Irish currency was formally split off from sterling, bank balances in Ireland automatically remained as Irish pounds, while contracts written under Irish law were in Irish pounds too. So Irish government stock was in Irish pounds, or punts. Contracts under UK law or international law remained in sterling.