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by Stuart Burns

<< Click here to view Part I

The euro is the second most liquid currency in the world after the U.S. dollar, accounting for nearly 40 percent of all daily trades. After that, liquidity in alternative currencies drops sharply, with the yen present in 19 percent of trades, pounds sterling in 13 percent and the recently popular commodity currency-- the Australian dollar-- in less than 8 percent. Central banks looking to diversify their foreign currency holdings out of the dollar, which are among the biggest buyers of the euro, have few alternatives.

The worries are over what the knock-on effect of a Greek exit would be, who would be next and where would it end. For Greece itself, an exit would be painful for a year or two, but potentially after that the country could return to growth aided by a much more competitive exchange rate and a dilution of its debts. Indeed, there is no reason why the euro could not exist side by side with a new drachma much as Swiss francs, U.S. dollars and euros are accepted in London stores, or indeed any major European city.

As Samuel Benjamin writes in the FT, the main difference would be that the Greek government would have to finance its own budget. Ironically, that would still involve a large degree of austerity as Greece has been living beyond its means and, in or out of the euro, cannot afford to fund the levels of spending it has enjoyed over the last 10+ years.

The key to maintaining the euro at anything like its current level will be what steps Brussels takes to limit the exit to Greece. In the short term, this will mean something like euro bonds to prop up the next in line (Portugal or Ireland, or worryingly, Spain), but perversely a successful Greece would encourage other troubled states to seriously consider an exit.

At present, everyone is doing whatever they can to avoid it, but seeing Greece prosper from leaving the euro could start a rush for the exit and that could spell the end of the euro — or, at the very least, lead to a vastly different EU.

Source: Can Brussels Limit Euro Exit To Only Greece?