Save your European money, boys....
May 16, 2010 9:06 AM Subscribe
I've read a few articles that mention the collapse of the Euro. Any idea what that would look like? Could a country like France or Germany simply walk away? Could the currency survive that? What would they do until they had fresh DM or francs or whatever?
for what little I know about economics, the day France or Germany decided to walk out of the Euro, the 'new-Franc' or 'new-Marc' would jump so high in value that it would stop their exports virtually overnight. They know that, so it's not likely to happen.
On the other end of the spectrum, if, say, Greece decides to get out of the Euro and devalue, they'd probably find themselves and the 'new-Drachma' in a position similar to 1920 Germany. The catch with the Euro is that it is built on the assumption that all the partners play 'fair', and that all the national economies are created equal (neither of which is actually true, and we're having proof these days), meaning that one 'german' euro has the same value of a 'greek' one. Once someone gets out, it's very likely that the whole castle falls apart.
Which is why despite all the pre-elections political posturing by Frau Merkel, Greece is still in the Euro, albeit with very harsh measures. Italy is coming too, there's a €25bln budget law (over two years) in the works.
posted by _dario at 9:36 AM on May 16, 2010
On the other end of the spectrum, if, say, Greece decides to get out of the Euro and devalue, they'd probably find themselves and the 'new-Drachma' in a position similar to 1920 Germany. The catch with the Euro is that it is built on the assumption that all the partners play 'fair', and that all the national economies are created equal (neither of which is actually true, and we're having proof these days), meaning that one 'german' euro has the same value of a 'greek' one. Once someone gets out, it's very likely that the whole castle falls apart.
Which is why despite all the pre-elections political posturing by Frau Merkel, Greece is still in the Euro, albeit with very harsh measures. Italy is coming too, there's a €25bln budget law (over two years) in the works.
posted by _dario at 9:36 AM on May 16, 2010
Best answer: What you've been reading was mostly written by people who were short euros I suspect..
Mutant posted something regarding this here : http://www.metafilter.com/88458/The-other-exit-strategy . Check out the ecb document linked there -- there basically is no provision for leaving the euro, and even if it were to happen, it's a process that takes years.
What I wouldnt rule out is the emergence of local currencies or similar, like for example state IOUs that circulate parallel to the euro.
posted by 3mendo at 9:59 AM on May 16, 2010
Mutant posted something regarding this here : http://www.metafilter.com/88458/The-other-exit-strategy . Check out the ecb document linked there -- there basically is no provision for leaving the euro, and even if it were to happen, it's a process that takes years.
What I wouldnt rule out is the emergence of local currencies or similar, like for example state IOUs that circulate parallel to the euro.
posted by 3mendo at 9:59 AM on May 16, 2010
In practical terms I suppose they would have to introduce a DM (let's say) which was initially pegged to the Euro, issue banknotes, possibly run two currencies in parallel briefly, then cut loose. It surely couldn't be done very quickly.
It can be done, though. There are partial parallels in the split of the Czech Koruna, and perhaps to a lesser degree in the separation of the Irish Punt from the British pound.
posted by Phanx at 10:20 AM on May 16, 2010
It can be done, though. There are partial parallels in the split of the Czech Koruna, and perhaps to a lesser degree in the separation of the Irish Punt from the British pound.
posted by Phanx at 10:20 AM on May 16, 2010
The Euro is a disaster.
A good example would be Argentine economic crisis. Argentina had pegged it's currency to the dollar, and it let its citizens use dollars or pegged peso. It wasn't part of any kind of organized group of dollar countries, it jut did this on it's own.
Anyway, the economy collapsed and Argentina ended up pulling the peg, and in the process converting everyone's dollars in bank accounts to pesos, basically screwing them.
You're much more likely to see Greece and more heavily indebted countries like Italy, Portugal, etc leave then the big players like France or Germany. The purpose of leaving would be to inflate their currency so they can pay their debts. That would be cheaper then staying in the Euro and raising taxes to pay off external debts.
They'd still need to cut spending in the future, though. Krugman isn't even sure $1t is enough to save the Euro. Unlike the U.S, where welfare and most government spending is centralized -- so an economic shock in one state doesn't affect government services as much, each euro zone country is responsible for paying for all welfare, so in order to stay in the Euro, the countries need to cut services.
Of course, voters feel like they're getting screwed for other people's mistakes, which is true -- The reason governments have less money now is because the crisis made us all permanent poorer then we otherwise would be.
So I'm not sure how it will be politically sustainable. We'll have to see. Really, the eurozone needs to inflate it's currency, but they're so obsessed with fighting inflation they probably won't.
posted by delmoi at 10:47 AM on May 16, 2010 [2 favorites]
A good example would be Argentine economic crisis. Argentina had pegged it's currency to the dollar, and it let its citizens use dollars or pegged peso. It wasn't part of any kind of organized group of dollar countries, it jut did this on it's own.
Anyway, the economy collapsed and Argentina ended up pulling the peg, and in the process converting everyone's dollars in bank accounts to pesos, basically screwing them.
You're much more likely to see Greece and more heavily indebted countries like Italy, Portugal, etc leave then the big players like France or Germany. The purpose of leaving would be to inflate their currency so they can pay their debts. That would be cheaper then staying in the Euro and raising taxes to pay off external debts.
They'd still need to cut spending in the future, though. Krugman isn't even sure $1t is enough to save the Euro. Unlike the U.S, where welfare and most government spending is centralized -- so an economic shock in one state doesn't affect government services as much, each euro zone country is responsible for paying for all welfare, so in order to stay in the Euro, the countries need to cut services.
Of course, voters feel like they're getting screwed for other people's mistakes, which is true -- The reason governments have less money now is because the crisis made us all permanent poorer then we otherwise would be.
So I'm not sure how it will be politically sustainable. We'll have to see. Really, the eurozone needs to inflate it's currency, but they're so obsessed with fighting inflation they probably won't.
posted by delmoi at 10:47 AM on May 16, 2010 [2 favorites]
What would they do until they had fresh DM or francs or whatever?
Assuming that Germany leaves the Euro -- which is a big assumption -- there are two possibilities I've seen mentioned on online financial fora lately. Both could be total bullshit, but here they are:
1) Euros have different serial numbers on them, depending upon where they were printed; one letter represents the printing press and country that was used for that particular note. Normally, this shouldn't mean anything at all, but one option could be that only Euros that were printed within Germany would be used as legal tender within Germany, at least temporarily.
2) There is a rumor going around online that not all the old Deutsche Marks were destroyed by the German government back in the day, and that Germany has a secret warehouse* or two full of them that they could deploy quickly, as a stop-gap until more could be printed up.
*where they were being looked over there by "top men", along with Professor Jones' ark, presumably. :-)
posted by Asparagirl at 11:06 AM on May 16, 2010
Assuming that Germany leaves the Euro -- which is a big assumption -- there are two possibilities I've seen mentioned on online financial fora lately. Both could be total bullshit, but here they are:
1) Euros have different serial numbers on them, depending upon where they were printed; one letter represents the printing press and country that was used for that particular note. Normally, this shouldn't mean anything at all, but one option could be that only Euros that were printed within Germany would be used as legal tender within Germany, at least temporarily.
2) There is a rumor going around online that not all the old Deutsche Marks were destroyed by the German government back in the day, and that Germany has a secret warehouse* or two full of them that they could deploy quickly, as a stop-gap until more could be printed up.
*where they were being looked over there by "top men", along with Professor Jones' ark, presumably. :-)
posted by Asparagirl at 11:06 AM on May 16, 2010
Response by poster: Some great answers here.
I hadn't even considered Greece walking or indeed any of the PIIGS flying. Not if there was a chance for more "free" money. I assumed it'd be the savers walking.
Mutant's comment linked to by 3mendo was, as always, very illuminating. I wish I had found that before I asked my question.
I guess I was kind of picturing a Euro collapse as a Soviet one - one group secedes, another follows, then a torrent, then it's all gone to the surprise of everyone.
I don't imagine the serial notes thing would be practical and, boy, would that cause all sorts of trade weirdness. Two levels of value (widely disparate if _dario is right) for the Euro based solely on serial number.
posted by codswallop at 12:27 PM on May 16, 2010
I hadn't even considered Greece walking or indeed any of the PIIGS flying. Not if there was a chance for more "free" money. I assumed it'd be the savers walking.
Mutant's comment linked to by 3mendo was, as always, very illuminating. I wish I had found that before I asked my question.
I guess I was kind of picturing a Euro collapse as a Soviet one - one group secedes, another follows, then a torrent, then it's all gone to the surprise of everyone.
I don't imagine the serial notes thing would be practical and, boy, would that cause all sorts of trade weirdness. Two levels of value (widely disparate if _dario is right) for the Euro based solely on serial number.
posted by codswallop at 12:27 PM on May 16, 2010
Response by poster: There is a rumor going around online that not all the old Deutsche Marks were destroyed by the German government back in the day, and that Germany has a secret warehouse* or two full of them that they could deploy quickly, as a stop-gap until more could be printed up.
That seems too shocking in its lack of faith to keep secret :)
But I wonder if they have been some off-the-record meetings to plan for rapidly-printed short-term emergency replacement currency. Wow.
posted by codswallop at 12:30 PM on May 16, 2010
That seems too shocking in its lack of faith to keep secret :)
But I wonder if they have been some off-the-record meetings to plan for rapidly-printed short-term emergency replacement currency. Wow.
posted by codswallop at 12:30 PM on May 16, 2010
I have been involved in the currency markets for 20 years. For my money, its more likely that Germany would kick out Greece rather than leave the euro. I think the chance of a Germany leaving is very small (<1>
Inside baseball: Trichet's term at the ECB is up in a year or so and the speculation had been that Bundesbank chief Webber would get the job. With his public, vocal dissent from the ECB's commitment to buy Greek debt now the thinking is that the head of the Bank of Italy will get the job. So now your currency is run by the guy who brought us the Lira. The German tabloids will go crazy.
Anyhow, here is some comments from the FT's market blog, Alphaville:
posted by shothotbot at 12:48 PM on May 16, 2010
Inside baseball: Trichet's term at the ECB is up in a year or so and the speculation had been that Bundesbank chief Webber would get the job. With his public, vocal dissent from the ECB's commitment to buy Greek debt now the thinking is that the head of the Bank of Italy will get the job. So now your currency is run by the guy who brought us the Lira. The German tabloids will go crazy.
Anyhow, here is some comments from the FT's market blog, Alphaville:
Some analysts and politicians have suggested Greece should leave the eurozone, but such a move would neither be easy, nor even a solution to either the Republic’s or the currency union’s woes.Some US lawyers have put together a how to break up the euro brief too, which has been making the rounds, but I dont have it handy.
From a strictly legal standpoint, the challenges are formidable, not least because there is no precedent for either withdrawal or expulsion from European Monetary Union.
Moreover, to quote a 2009 publication by the ECB titled, ‘Withdrawal and expulsion from the EU and the EMU: some reflections‘ (emphasis ours):
In the unlikely event that a Member State withdraws voluntarily or is expelled from the EU, its NCB’s membership of the European System of Central Banks (ESCB) and euro area participation would be terminated, with the departing Member State having to restore its old currency or adopt a new one. Restoring a Member State’s old currency or adopting a new one would inevitably involve considerable risks and difficulties and entail substantial legal complications, including with regard to the validity and enforceability of outstanding re-denominated contracts between debtors in the withdrawing Member State and their creditors. Successfully resolving the issues arising would necessitate very close cooperation between the departing and the remaining Member States.
And according to a story in Risk magazine which featured interviews with legal experts on the matter:
“The prevailing view has been that a country cannot unilaterally legally exit the euro, so we might just as well worry about a member country announcing it would not honour any other treaty commitment.”
…
“Article 50 of the Lisbon Treaty [signed in 2007] allows a member state to withdraw from the European Union as a whole…But it does not contemplate a withdrawal from the single currency alone. It is not possible to infer a right to withdraw from the euro, since the Maastricht Treaty [signed in 1992] stated that the currency substitution would be ‘irrevocable’.”
Still, in the event Greece’s leadership is willing to contemplate such measures, they may well already have a PR agency on hand to deal with the ‘messaging’.
posted by shothotbot at 12:48 PM on May 16, 2010
oops, forgot about how I cant use less then signs with wild abandon here. I was saying in the post above that I would guess the chance of Germany leaving the Euro is very small, less than 1% and the chance of Greece leaving is small, around 1-5%.
posted by shothotbot at 12:50 PM on May 16, 2010
posted by shothotbot at 12:50 PM on May 16, 2010
Take into account that Greece's current debt is all Euro denominated, that would remain true even if they left the Euro. I guess they could leave and then declare all debts payable in their new currency, but most investors would consider that pretty much a default anyway, so there is really no advantage to doing so.
posted by atrazine at 1:41 PM on May 16, 2010
posted by atrazine at 1:41 PM on May 16, 2010
Take into account that Greece's current debt is all Euro denominated, that would remain true even if they left the Euro.
Interestingly, about 90% of Greek debt is covered by Greek law, so if they pass the Re-Drachmaifcation Act of 2012, and you hold one of those bonds, guess what you are getting paid. I am not not saying that it wouldn't be a default, but they are unlikely to pay in full and on time in any case and they will not be in the same situation as Argentina, where assets could be seized by courts in New York or London (because many Argentinean bonds marketed overseas were governed by US or UK law)
posted by shothotbot at 3:16 PM on May 16, 2010
Interestingly, about 90% of Greek debt is covered by Greek law, so if they pass the Re-Drachmaifcation Act of 2012, and you hold one of those bonds, guess what you are getting paid. I am not not saying that it wouldn't be a default, but they are unlikely to pay in full and on time in any case and they will not be in the same situation as Argentina, where assets could be seized by courts in New York or London (because many Argentinean bonds marketed overseas were governed by US or UK law)
posted by shothotbot at 3:16 PM on May 16, 2010
I cant use less than signs
Sure you can. Just use this special code name for "less than": < = <
Likewise, for "greater than": > = >
posted by exphysicist345 at 5:41 PM on May 16, 2010
Sure you can. Just use this special code name for "less than": < = <
Likewise, for "greater than": > = >
posted by exphysicist345 at 5:41 PM on May 16, 2010
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posted by asharchist at 9:25 AM on May 16, 2010