The incredible return of the peseta

The alarm clock goes off. After a quick shower, a man goes down to the corner café and orders a coffee.

— That'll be 250 pesetas.

— How much did you say?

— 250 pesetas.

— For a café con leche?

— It's the same price as before.

"Before" refers to just a few days earlier, when a cup of coffee still cost 1.50 euros. An upset waiter says that he is using the original exchange rate (1 euro=166.386 pesetas) established in late 1998.

In this play, recently performed at a café theater, the time is June 2012, and the unimaginable has actually occurred: Greece abandoned the euro in April, and a month later the financial tidal wave dragged Ireland and Portugal in its wake. Italy is teetering dangerously on the brink, and Spain has gone back to the peseta.

A man goes down to the café to order his coffee. "That'll be 2.5 europesetas"

Individuals would start taking their savings in euros out of Spanish banks

European banking contagion would cause "the mother of all financial crises"

The breakup of the euro zone has long been considered an impossible event, even by those who harshly criticized the way it was born. But the public debt crisis and the response by European leaders has changed that outlook. In early November, French President Nicolas Sarkozy and German chancellor Angela Merkel showed Greece the door and placed Italy under surveillance.

"Over the next decade, it is very unlikely that no country at all will pull out of the euro zone," wrote Barry Eichengreen of the University of California in 2008, in one of the best-known analyses on the issue. But Eichengreen believed that the alleged cure could be even worse than the disease itself, even in countries undergoing a brutal recession like Greece. These days, Eichengreen continues to feel the same way, except now he is a lot more pessimistic.

"If they don't give the reforms time to generate growth, that will be the euro's death sentence," he warned a few weeks ago. And according to him and most other scholars, only Germany and the European Central Bank can buy that kind of time.

Pulling out of the euro zone poses enormous legal challenges. As the British jurist Charles Proctor has analyzed in great detail, there is only one way out: Article 50 of the Union Treaty, which also implies a simultaneous exit from the European Union. Unless the treaties are reformed, there is no way of kicking a member state out of the euro zone.

History shows that monetary unions can break up: the Austrian-Hungarian empire, the Soviet Union, Yugoslavia and even the US during the Civil War provide ample evidence of it, although it was almost always as a consequence of economic and political collapse.

A few minority voices claim that there are more advantages than drawbacks to leaving the euro zone. A report by the consulting group Capital Economics holds that for Ireland, Greece, Portugal, Italy and Spain, it would be better to return to their national currency and regain control over monetary policy. That would allow governments to devaluate and use the central bank to print legal tender, and buy public debt if necessary. With a cheaper currency, exports would benefit greatly, too. According to this report, a sharp drop in domestic demand would soon be compensated with a dramatic rise in exports and tourism.

The alarm clock goes off. After a quick shower, a man goes down to the corner café and orders a coffee.

— That'll be 420 pesetas.

— Good heavens! For a coffee?

It is June 2012. As soon as the peseta went back into circulation, it depreciated 40 percent. Hotels are booked solid by foreign tourists. The GDP is in a freefall, and the jobless rate is hovering around 23 percent.

Experts at UBS, Citigroup or Rabobank figure that, if reintroduced, the peseta, the drachma or the lira could depreciate by 40 to 60 percent against the euro. The CEO of UBS, Stéphane Deo, considers that any such move would constitute "a catastrophic scenario."

The vast majority of financial studies share the views put forward in Eichengreen's work. At the slightest indication of a return of the peseta, individuals and businesses would start taking their savings in euros out of Spanish banks. There are two reasons for that: one, euros spared from being turned into pesetas would not lose their value with the inevitable ensuing depreciation. And two, maintaining that value is essential in order to repay debts that are still calculated in euros.

As a result of the massive withdrawal of savings, the Spanish banking system would go bust. Thousands of companies would shut down. The competitive advantages of devaluation would disappear with rising inflation and the levies on exports that the rest of the European Union would impose.

Also, interconnectedness among European banks would guarantee a quick contagion effect. It would be "the mother of all financial crises," in the words of Eichengreen.

The fears appear to be not entirely unfounded. In two years, cash deposits at Greek banks have decreased by 23 percent. Only a surprise, fast-track conversion could limit the damage, and Eichengreen feels that this is impossible: exiting the euro zone needs to be negotiated with the rest of the EU member states; reintroducing a currency requires endless technical groundwork. These are long processes that would set alarm bells ringing well ahead of time.

These worst-case scenarios foresee such an extreme fall in GDP (between 30 and 50 percent) that they immediately become an undesirable option.

Yet other theories have been posited, without any valid precedent to back them up, in which there is an intention to limit the heavy damage.

The alarm goes off. I Got You Babe by Sonny & Cher can be heard. The man goes down to the café to order his coffee.

— That'll be 2.5 europesetas.

— Are you kidding me?

It is June 2012. On Saturday, in a surprise move, the European Council approves Spain's exit from the EU. That same day, a national decree prohibits bank account holders from withdrawing more than 100 euros a week.

On Sunday, a new exchange rate goes into effect; 1 euro=1 new peseta.

On Monday, banks, ATMs and all kinds of official agencies stamp people's euros to be used as new pesetas until these are actually printed. A 20-euro bill is now the equivalent of 20 new pesetas or 20 europesetas. The new currency depreciates by 40 percent as soon as it is floated. Eric Dor, of Lille University, proposes using euro notes to bypass the technical problems of reintroducing a currency in his Manual to exit the euro zone, published in October.

June 2012. The television set at the corner café is reporting on a new European summit. Bailout payments to Greece have been approved, and banks have accepted a 60-percent loss on the money they lent to Ireland and Portugal. There is support for enlarging the International Monetary Fund's resources, and the international agency contributes 200 billion euros to the rescue fund. The fund and the European Central Bank buy Italian and Spanish bonds. Spain's jobless rate grows, as do budget cuts. Coffee is 1.50 euros.

— "The usual?" the waiter enquires.

— "No, I think I'll have a herbal tea," says the man wearily. Curtain falls.