Mechanics of a Eurozone breakup

There’s a widespread view that a breakup of the Eurozone is looking likely. I don’t want to debate whether this is correct or not - but I would like to hear some views about the practicalities (not legalities) of a breakup.

Option 1 is that the PIIGS leave / are forced out of the Euro. Even if there was the domestic political will, personally I can’t see how this could possibly happen. When I remember the level of preparation that was required prior to adopting the Euro I can’t see how Ireland could ever pull this off in secret to introduce the punt nua.

Option 2 is that a two tier euro is introduced. This might mitigate some of the practical issues in introducing a new national currency, but it still seems to leave massive practical problems. Thoughts?

Option 3 is that Germany leaves the euro (possibly followed by others). Doubtless the Bundesbank would be more efficient than the Irish institutions in introducing a new mark. But many of the same practical problems seem to remain. The only difference from option 1 appears to be that funds will flood into (not out of) Germany as it becomes clear what it intends to do. Would this be enough to make this a practicable option?

In short - if we accept for the sake of argument that the forces pulling the euro apart are insurmountable, what form might a breakup take and how might national governments avoid the obvious problems?

At the risk of sounding condescending …

There was a widespread view, propagated by vested interests and championed by the popular media, that Irish property only went up.

There was also a widespread view, propagated by vested interests and championed by nationalist popular media, that the Euro would be dead within 5 years of its launch, then within 10 years.

Equally, there was a widespread view, propagated by vested interests and championed by the popular media, that Ireland had created a new economic paradigm.

The game is, spot the emerging pattern … :confused:

A PI(I)GS only currency is only slightly less worthless than each of the individual potential constituents breaking away from the Euro (Imagine for a moment a Northern Ireland only Pound or Arkansas only Dollar).

Germay leaving, would create more problems short term for that country than reunification did, but both the Euro and Germany would survive (just so long as France remained in the EZ).

IMHO, the only event that would kill the Euro from the inside out, would be the UK joining, with its history of massive internal economic bubbles and crashes.

Blue Horseshoe

The euro isnt going to go away. The PIIGS will do austerity. Germany will do some inflation. And we’ll all meet in the middle somewhere.

Its the USD Id be more worried about. The euro will be worth 20% more this time next year, around $1.50 compared with $1.31 today.

We are heading the same way as the USA, We have a federal Europe and harmonizing of some Taxes and I can see ECB will have no choice but to print money and buy 30yr bonds at 1%…

In order to accept the proposition of the Euro breaking up you unleash the normal rules of everything works so much that the mechanism literally doesn’t matter. There’s no way to breakup the Euro so something ad-hoc would have to be created and it could be anything.

It’s the same as people who think they’re going to wake up some morning to learn the government has declared an emergence and switched everyone over to “Punt Nua”. Once you accept that as realistic then the mechanisms again don’t matter.

I don’t think the Euro will break up although this is obviously a tough time for the currency.

In this sense the Euro has shown you can’t have a US-style currency without a US-style federal government with similar powers and authority over member states. Simply relying on the various states not to be idiots (hi Ireland!) doesn’t work.

hi sharper, give us a wave! :slight_smile:
(I’m just doing my bit for the Bord Failte friendly Irish campaign)

I think the Euro is not going to survive in its present form, ie that either the PIIGS and maybe some others, will get out, or Germany/Austria/Belgium/Lux and France possibly will form some sort of currency in an economic alliance and the rest of us would then be able to devalue our independent currencies to facilitate our economic recovery.

Does anyone think we could end up being a branch of Sterling!!! If Sweden, Britain etc have specified that they want us to pay them back in Sterling regarding our most recent tranche of ‘Ludicrous Loans Received’… And Wales, Scotland, England and Northern Ireland all have their own home produced Sterling notes. It may at some point be even a considered option for us although I could be having a Blonde Moment here 8DD . Cross Border shopping would be more manageable then, especially if we had someone who understood basic economics in charge of VAT

And how long did that take? Don’t expect a federal Europe to take any less time. Hopefully we’ll avoid the dirty civil war and the extermination of native peoples…

I think we did our “War between the states” and extermination business already.

As for how long it took it depends on when you want to start the clock. The Articles of Confederation which was a much weaker union was replaced by the US constitution after 6 years.

I don’t for a minute foresee the forces pulling the euro apart to be insurmountable. The PIIGS are in trouble, and their options to get out of debt are inflation or austerity. They need Germany’s approval for whatever they do. Germany can play i.e. can accede to their demands, but they can also say no, go swing to the PIIGS. This will be an indirect strain on the German economy because the overal eurozone will be depressed because of this. Germany is happy to let that happen. There is no better position to be in than having strong export orientated industry in a weak overall economy. People still think that the German economy or the French economy or the Irish economy are different, but we are all the same economy with different regions. It will be just like the 90s when Dublin, Cork and Galway flourished while Donegal dwindled. The same thing will happen, but on a Eurowide basis.

Even if the deflationary pressures were insurmountable, Germany would rather go the QE route rather than see the Euro break up.

As for the three options, any of the three would do. There is no real mechanism in place, so what would be the most prefereable? Well PIIGS voluntarily leaving would make the most sense, and I agree that it would mean that there would be unprecedented capital flight. 2 seems politically unworkable and 3 is also an option but again I can’t imagine the Germans would be too keen to be seen bailing on their own (more or less) project.

I think the EU is a good idea for the people of all the European nations in the sense of ease of movement and trade. The problem is its original conception was much much deeper than this. I believe that the EU and Euro can and should survive, but only in its original ‘mass-marketed sales pitch conception’.
Each member state must preserve their nation, their sovereignty, their self-determination.
What we are currentley experiencing is a lot of monkey business that needs to be stopped.
o…k… so, what is Andorra?
One of the world’s smallest independent nations, with a highly secretive tax system. Highest average life expectancy in the world (83 years) No income tax, Capital Gains Tax, sales tax or death duties and an import tax of around 2 to 5 per cent. It maintains absolute discretion with foreign tax authorities. The taxes levied on businesses **do not affect **expatriates. Where is Andorra? Landlocked, snugly comfortably between Spain and France.
What is the Channel Islands, between England and France?
The Channel Islands fall into two separate self-governing bailiwicks. Both the Bailiwick of Guernsey and the Bailiwick of Jersey are British Crown Dependencies, but neither is part of the United Kingdom. They have been part of the Duchy of Normandy since the 10th century and Queen Elizabeth II is often referred to by her traditional and conventional title of Duke of Normandy. The islands are not part of the European Union, but are part of the Customs Territory of the European Community, by virtue of Protocol Three to the Treaty on European Union. They are tax havens.
Liechtenstein between Austria and (non-EU) Switzerland?? An independent relic of the Holy Roman Empire, the tiny Alpine monarchy has used its reputation for banking secrecy to create assets worth at least £75bn. Comparatively low business taxes (a maximum of 18 per cent), a basic personal income tax rate of 1.2 per cent and absolute financial discretion. Banks and “discreet” financial services account for 14.3 per cent of the workforce. 5,000 businesses in a country with 35,000 residents, oh, and hundreds of EU residents are avoiding taxes.
Monaco? Surrounded on three sides by France and just miles from Italy but non-EU, It is famous as a tax haven, and wealthy foreigners make up the majority of the population at approximately 84%.
Monaco is a constitutional monarchy and principality, with Prince Albert II as the head of state. For those rich enough to win resident status, no personal income tax or CGT combined with a strong record for banking secrecy and non-cooperation with European countries who want to find out who avoids taxes there.
Switzerland? We all know about swiss banks.
Vatican City? non-EU, and well worth learning about.
Luxembourg? EU, country. In March 2010, the Sunday Telegraph reported that most of Kim Jong-Il’s $4bn in secret accounts is in Luxembourg banks. Luxembourg is the world’s second largest investment fund center (after the United States), the most important private banking center in the Eurozone and Europe’s leading center for reinsurance companies. Moreover, the Luxembourgish government has tried to attract internet start-ups. Skype and eBay are two of the many internet companies that have shifted their regional headquarters to Luxembourg. Concern about Luxembourg’s banking secrecy laws, and its reputation as a tax haven, led in April 2009 to it being added to a “grey list” of nations with questionable banking arrangements by the G20.
And of course, dear ol’ Ireland. Our IFSC is like the Bermuda of Europe. 10% of the world’s ‘reassurance’ business goes on there. It is a hotbed of ‘ghost’ or ‘front’ companies. In 1998 the Regulator revised Bank licensing regulations to allow certain corporate entities to be licensed as banks ( with little or no regulation) and at one point there was over 400 of these ‘firms’ at the IFSC. Many of them subsidies of subsideis of corporations from other countries, predominantly tax-havens.
The EU cannot be allowed to survive and its member countries cannot be allowed to continue ‘doing business’ as things stand. The EU could be of great benefit to the people of its member states. But radical changes must take place within its structuire and regulation.

The likely scenarios depends on whether it is an orderly or disorderly break up. If disorderly then there is no knowing how the proximate dynamics may play out. It would be more like the financial crisis around the gold standard in the early 1930’s when some pretty bizarre short term situations arose. Such as the New Zealand pound have two completely different (and contradictory) exchange rates for a while. A disorderly break up would be the worst possible outcome but based on the current track record of those in power in the key eurozone countries it seems more likely than a pragmatic facing of facts and an honest attempt to reconfigure the eurozone currencies so it more accurately reflects economic reality.

An orderly reconfiguration would probably involve the weaker currencies being shifted back to an ERM II peg with at least one or two revaluations as most of them drifted below the 15% band limit over the following few years. Apart from Ireland the majority of the weaker countries sovereign debt is held domestically (and tends to be at the longer end of the curve) which makes restating the debt in the new currency a lot more straight forward. Irelands debt is mostly foreign held and now on short term rollover so a formal restructuring event would happen so after the first devaluation. Expect massive government spending cuts as they can no longer borrow money. The dislocation of the restructuring will be alleviated somewhat because the government now controls (owns) the whole domestic banking system which gives them more latitude to finesse the transition. It still will be very nasty and politically disruptive.

The entrepot (MNC) and IFSC sectors of the economy are almost completely detached and independent of the domestic economy and will be little disturbed by what goes on unless there are major changes in tax and financial regulations forced through by Brussels in the aftermath. But I expect that to happen no matter what happens to the euro. The current tax / regulatory regime is unlikely to survive the current crisis.

At a practical level the price of imports will go up. Inflation will also go up but probably not to 1970s’ levels. As will interest rates. Maybe a big jump in both if the devaluation is rapid and the new currency needs to be defended. The current euro notes will be over printed (with the country code as a counter check) and new notes will be introduced in the same manner as the New Franc in 1960 (although not with the same markdown). Ireland had defacto two currencies for almost 60 years (10% of notes were sterling) so both the old euro and new currency will co exist during the transition. If a bunch of the weaker countries banded together with a common devalued euro it would probably by organized like the CFA Franc in the former French African colonies. Or it might be organized like one of the old pegged British Colonial currency groups. Some were begged to sterling. Some to the dollar. Its not like this has not happened before.

I’d also expect a return to some form of capital / currency controls. The lesson from the Asian crisis of the late 1990’s is that capital controls work during major crises. The other SE Asian countries learned that lesson the hard way from Taiwan.

The upshot of a reconfiguration of the euro would a quick reset of Irelands standard of living to the early 1980’s. But to stay with the current configuration would leave Ireland with a crushing unpayable debt, a slower decline of the standard of living to 1980’s levels and any hope of future economic recovery much like it was in the early/ mid 1950’s. None at all without radical structural reform. By this stage none of the options are very pleasant.

I really don’t think these European projects are very permanent. Just look at history on the Continent: From enforced union through empires to Holy Romans, Polish-Lithuanian Commonwealth, Hanseatic League, the union between Sweden and Norway, Denmark and Norway, the list is long and full of failures. The only unions that have *really *worked are when people of the same ethnic backgrounds join together. This European thing is the latest crock in a long line of crock and will ultimately be a clustercrock for Ireland. The good news is that it won’t be as bad for us as our last union with the Brits.

Albeit DeV then went and destroyed our economy after we got independence…

There will never be a united states of Europe. Europeans are way too tribal for that.