Strategic interactions and contagion effects under monetary unions

Although the European Monetary Union has now survived for 11 years, the current strains within the euro zone show why it may not last for another decade without at least some of its members leaving. [...] Leaving the euro zone would be an attractive alternative for Greece because it would allow Greece to devalue its currency. That would boost Greece’s exports and reduce its imports. The resulting increase in production would offset the decline in GDP caused by the tax rise and the cuts in government spending. [...] similar conditions apply to some of the other peripheral eurozone countries. It is possible, therefore, that one or more of them could leave.