Preparing for a Breakup in the European Monetary Union

Preparing for a Breakup in the European Monetary Union → … 0Final.pdf

“Anybody who still believes that a breakup of the Euro is impossible should at least re-examine this assumption with a skeptical eye. Experience shows that, in confrontations between politics and financial markets, events sometimes move from impossible to inevitable without ever passing through improbable.”
GaveKal Research

That is an excellent quote. … +Reckoning

I really don’t understand how countries leaving the euro would be anything but positive for the euro. (And let’s be clear here - “leaving the euro” isn’t enough - each country would need to leave the euro and “re-denominate” their euro debt into their new currency. This of course has exactly the same effect as a partial default.)

If the PIIGS left the euro and re-denominated their debt into a new currency then the euro would become stronger because all of their previous euro debt has now been destroyed, and there is now less euro currency out there. In other words, the holders of the euro bonds previously expected to get their money back and be able to spend it again - but now the euros they loaned will not be returned to them when the bonds expire.

So surely the euro should get stronger on this “news”? I would go so far as to argue that the only way for the PIIGS to stay in the euro would be to get the ECB to print the money for them. They cannot pay back their euro debt without access to the ECB printing presses.

Anyone care to argue why the financial world is currently selling the euro on these “leaving the euro” speculations?

As someone who remains short Eurodollar (current target of 1.20-1.22), here is my (vested interest) reasoning:

  1. The lack of a fiscal and political union to balance monetary union meant that as soon as a crisis emerged the soft underbelly of the Euro would be exposed. Its pretensions to be a reserve currency would be undermined.

  2. The domino effect, as in the reasoning behind the US involvement in South East Asia in the 1960s, whereby if one country falls or is bailed out, attention will immediately switch to the next in line, and so on. This undermines investor confidence.

  3. The belief that German and French banks are so exposed to PIIGS debt, that ultimately they have to do a bailout, and that current hardline posturing by Germany is mainly for domestic political consumption.

  4. The failure to tackle the scourge of Credit Default Swaps means that speculators can easily influence market perceptions of risk by driving up the cost of borrowing.

  5. The Deutschmark historically traded in a range which would be the equivalent of the Euro moving from 0.8 to 1.6 against the dollar. So the Euro is currently well above its mid-range historical position vis a vis the dollar.

  6. The bulk of speculation and negative press coverage is orchestrated by American financial institutions and hedge funds, and supported by the City of London, who are generally hostile to “socialist” Europe and its pretension to rival the Almighty Dollar.

True. Thats the best one since “Markets can remain irrational longer than you can remain solvent” :slight_smile:


Suppose Germany or France were to decide for local political reasons, “sod this I’m off” and pull out. How do you think that would be positive for the currency? For the Euro, or for any currency to work, it must be a “for better or for worse” relationship. You cant start throwing the unruly kids overboard the first time your hit some choppy water. Should the US dump Arkansas, Mississippi or Alabama in order to strengthen their overall currency?

The above article identified the players but not the reasons. Yes the PIIGS are a problem, yes the global economy is in a serious mess, yes the inept and greedy banks screwed us over as did the even more inept politicians, but the markets are now looking for somewhere to make money, and suggesting a currency bounce on the back of picking on one of the “runts” in the Euro pack is an easy target.

If the markets (with some help form the German and Greek electorates) were to get their way and Greece were to be kicked out of the Euro it would, IMHO, pitch that country into an economic death spiral the likes of which Europe hasn’t seen. Then, how long do you think it would be before the markets came after the next runt; Ireland?

Blue Horseshoe

Say Greece leave and then Italy Spain & Portugal.

We have little or no economic connection to them?
We are net exporters?
We host lots of eurozone related business and finance activities?
Do we stay or do we go?

With the Club Med out, do other countries join? Do Denmark, Sweden, Norway?

It would the death knell of the Euro project. Norway aren’t in the EU by the way.

Quite right.

Do the advantages of the common currency outweigh the disadvantages for some countries?

I think you’re thinking too narrowly.

At the end of the day, the machiavellian angle to the Euro project, which is to create jobs for the boys for insiders, a whole new raft of them, will win out. There’s very much a political prestige element whereby they want to see Europe as a rival to the US, Asia, in a bloc of it’s own right. Of course, there’s many ways of achieving this.

But a Federal Europe has a nice ring to it, don’t ya think?

We’ll get you Norway yet!

I disagree Blue, in my view if a country will not make the required changes to its fiscal governance it gets no support and gets dumped out. However if a country makes the changes, even if it will take some time I can see them being supported and protected from the credit markets.

Now where that leaves Ireland is beyond me because even though we are making the small changes in our budget we are torching money at a ferocious rate but it is ECB sanctioned??? So I could see us being protected and let stay in but say good bye to any remaining shred of our own fiscal control.

As for septics idea. DRR is first time I’ve gone for a double leveraged fund and no regrets so far.

Agree with that entirely. That’s why leadership is required by all the governments in question, regardless of what their populous are baying for.

Otherwise, we’re just back to the flimsy ERM arrangements, but with exponentially more “collateral damage” for any country falling out of the boat.

Blue Horseshoe

Historical example of breakup of monetary union … _republics

God help those who have significant debt in Euros if this happens.

Plans are already in place for such a scenario if required…(JMO)


Scaremongering or a real risk??

If the laggards keep the Euro cheap then their exports benefit. Plus bailing out the laggards means having real say in their restructuring which can only help exports further.

Ultimately instigating border checkpoints doesn’t negate the free access, it just adds a turnstyle. So they can keep their Euro advantage while allaying public order concerns at the same time.

What they don’t want is to be surrounded by serial currency defaulters again.