Daily Archives: October 7, 2010

If the Euro does not survive what would be the aftermath?

Big name economists such as Nobel Prize winner Joseph Stiglitz and Tim Congdon are voicing severe doubts about the survival of the Euro. Indeed,  In a speech earlier this year to the Bruges Group  the British economist Tim Congdon forecast  its  early demise . Much as I would like to see this for it would severely undermine the EU as an institution, perhaps to the point of rapid dissolution, I think they are being overly optimistic for one glaring reason, namely, the position of the Euro as the second largest reserve currency.

The implications of this  fact go far  beyond the intense desire of the EU elites to preserve the Euro to provide the glue to maintain the greatly expanded union and as a platform for further federalisation,  because a failure of the Euro would have serious economic and political  consequences worldwide. A collapse of the Euro would both reduce to rubble the EU’s attempt to project itself as a superpower and  leave the EU subject to economic sanctions by countries outside the EU which had lost out through the Euro’s collapse.  That alone would provide the most pressing reason for the Eurozone elites to maintain the currency, even to the point of engaging in large  capital transfers  from richer to poorer Eurozone members.

These are the questions which need answering by those who think the Euro will collapse:

1. If the Euro collapses what will the holders of the Euro as a reserve currency receive?

The conversion of Euros to new national currencies of the Eurozone is in principle (but not in practise) straightforward, because the Euro holdings within the Eurozone could be converted to whatever the exchange rate of the each new currency is deemed to be, for example, a one to one parity for the Euro and a new German Mark and three to one parity for the Euro and a new Drachma (the  conversion ratios could be achieved either by negotiation within the Eurozone members or by allowing the new currencies to float for a few months and  then using their market valuations).

The position of the holders of the Euro as a reserve currency who are not Eurozone members  is completely different for they will not have a new currency to which to  convert. All want the new  Mark and none the new Drachma.  I suppose that they could be offered a basket of all the new currencies with the contribution of each weighted to a criterion such as the population of each Eurozone member. However, that would be tantamount to a substantial devaluation of the Euro holdings.

2. Running parallel to the  position of the reserve currency holders is the status of private individuals and organisations outside of the Eurozone holding Euros. How will be treated if the Euro ceases to be?  There would also be the complication of what the Euro was worth on the international markets at the time of its fall.

3.  If the Euro collapses, what  would be the cost of the recalculating contracts, financial instruments etc  based on the Euro?

4. If the Euro collapses, what  would  be the cost of creating new currencies for the Eurozone members?

I have yet to find a professional economist or financial commentator who is addressing these questions.   I can’t help but suspect their silence is because the reality of a Euro collapse is simply too ghastly for them to contemplate.


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