OUT WITH THE EURO
THE HAGUE - Following weeks of currency speculation, see-sawing interest rate adjustments and increasing pressures on the value of bonds issued by the Knootian state, the Vologdov administration and the Knootian Central Bank announced that it would be dropping out of the eurozone. While the euro will remain a legal tender inside Knootoss for the time being, government debt will be issued in a new Knootian Currency Unit (KCU), a virtual currency. The KCU will function as a unit of account and a unit of exchange in international trade involving Knootoss. A new physical currency may be created later.
Imperfect Union
According to a statement released by the Knootian Central Bank (KCB), the NationStates euro area does not constitute an optimal currency region. An optimal currency region is a geographical region in which it maximises economic efficiency to have the entire region share a single currency. The KCB cites a lack of trade with Europe and the European Union. The absence of trade agreements has limited labour mobility within the eurozone, as well as capital mobility and price and wage flexibility.
In recent years, the 'fit' of Knootoss in the euro area became worse, as intra-regional trade in the Western Atlantic region and Knootian trade with countries such as Pacitalia took off. While Knootoss is still physically a European nation, it has been economically oriented on the Western Atlantic region, its dependencies overseas and more distant free trading regions. The widely divergent business cycles be of Knootoss and other participant countries further put pressure on the idea of staying in the eurozone.
Consequences
Given Knootoss' historic reputation for sound finances, the country will likely emerge with a strong currency, and a safe haven for speculators keen to find a true store of value. But this will likely come with a huge cost: Knootoss will probably save its banking system at the expense of destroying its export base. Quitting the NationStates Eurozone would trigger a revaluation of Knootian currency against the rest of the world. Traditionally, the Euro has traded within a bandwidth of $1.96 - $2.05 to the Universal Standard Dollar. Experts predict that a free-floating Knootian currency, if it includes Knootian Federation participants such as Ale-Yarok, should trade around $2.23 Universal Standard Dollars.
This jump would make exports more expensive and could potentially compound the trade deficit. If a new Knootian currency does appreciate by around 20%, it would be roughly equal to the amount that Knootian industry has increased its competitiveness relative to the rest of the area since joining. Knootoss' significant net foreign assets would be equally reduced in value. While the increase in currency value would increase the purchasing power of Knootian consumers and businesses abroad, the external sector is likely to suffer from a huge shock.
Scenario's
While the Knootian Currency Unit (KCU) is a plausible stop-gap measure, it will be impractical to maintain a virtual currency over an extended period of time. The government and the KCB have pledged to adopt a new currency as soon as possible. The first plausible scenario would be the introduction of a single currency for Knootoss, Ale-Yarok and the unincorporated territories of the Knootian Federation. This currency, likely to be called the Guilder, the Florint or the Rijksmark, would have the advantage of giving Knootoss full control over it's own monetary policy.
Several currency unions present themselves as alternatives. There has been talk about a currency unit between Knootoss and Pantocratoria for over a year. An "Atlantic Ducat" could potentially attract other Western Atlantic States such as the Caldan Union and Excalbia, furthering regional cooperation. An alternative would be the adoption of the Minoan currency and a concerted drive to create a NationStates wide free trade area, with the option of entering a full monetary union. As always in these cases, politics are likely to trump economics when it comes to a valuation of these alternatives. Whether Knootoss should desire to be the standard-bearer of world-wide free trade or the faithful friend of deeper regional integration is a question that will surely divide the Vologdov Administration.












