Britannia Radio

Impossibility of leaving the Euro. Once in, you are stuck!


Many have said that the weak, indebted countries, or alternatively Germany, should leave the euro.

Here are some fairly simple, commonsense considerations on the practical implications of a country leaving the euro. These thoughts are based on practical experience, both in the days of fixed currencies (before 1971) and of floating currencies (thereafter). Most people spend all their lives dealing with one currency only, or with other currencies only when on short holidays abroad.

I have lived with, and worked with, several different foreign currencies for fifty years now. I also lived through the unique, epoch-making, changeover of a whole nation, from liras to euros, in 2002.

Now if it is Germany going back to the Dmark (as has been suggested by some), it will be moving from a weak currency - the Euro, which without Germany could be expected to sink like a stone - to a strong one - the new or revived Dmark.

For the changeover to take place, the Germans will have to announce a changeover day, in advance, when all holders of Euros can take them to any bank, and in exchange be given shiny new Dmarks.

And all bank account balances in Germany will be redenominated in Dmarks on that day. The changeover will have to take place at a fixed rate, determined in advance. Just as happened in 2002 when all the national currencies were exchanged for Euros.

The trouble is, that it won't only be Germans flocking to the German banks to change their money before Dday. It will be holders of Euros from all over the world!

This is because it will be obvious to all that after the changeover the value of the Dmark will go up, and that of the Euro will go down, considerably, and fast. It will be money for old rope.

A no-brainer thing for anyone not to do, including the Chinese central bank..... The exchange rate of the Dmark will therefore go up, far, far more than otherwise. Trillions of euros worldwide, will all want to turn themselves into valuable Dmarks, at the fixed rate announced, before Dday+1 when the euro will plummet. Like passengers on a sinking liner all trying to crowd aboard a single lifeboat.

As the new Dmark shoots into the stratosphere, the famous German export industry will thereby be priced right out of the world market. Just imagine the effects on German employment...

And imports would be dead cheap for Germans. Imagine the effects on the German balance of payments and indeed on Germany industry producing for the home market. Again, what would happen to employment levels? Through the floor. We remember what came after the last time that happened...

Likewise it will be impossible for a weak Eurozone country to revert to its original currency without catastrophic consequences. Say Greece decided to do it. To do this it would have to announce a "D-day" when the changeover from euros to drachmae would take place, and also to announce the rate at which the exchange was to be made.

This time the move would be from a strong currency - the Euro (assuming it would still be used by Germany) - to a weak one, the new drachma, which could be expected to sink and to be devalued (indeed that would be the whole object of the exercise).

Once again, money for old rope. Of course on the D-day itself, all Euro bank account balances in Greek banks would be redenominated into drachmae, at the fixed exchange rate. And on D-day+1 they would start to lose their value as the drachma devalued against the Euro and against other foreign currencies.

Everyone would know this in advance. No Greek would want to see the value of their cash savings depreciate along with the new currency.

So what could they do?

They could move their euro balances offshore, to euro accounts in other Eurozone countries, and just bring it back a little at a time, turning their euros into drachmae (at the new, floating - or rather, sinking - rate) as they needed it to spend in Greece.

The Greek government would have to establish exchange controls, to stop this happening. OK they could do this, but then all the Greek depositors would still want to hold euros for as long as possible, so they would take their balances out of the banks, in cash, in Euro-notes, before the changeover.

The mattress would be safer for storing value than the bank.

And then they would sell their Euro notes over the coming months for the new drachmae as and when they needed money to pay for their daily expenses. So you would have a mammoth run on all the banks of Greece as D-day approached as everybody tried to get their savings out while they were still in valuable Euros, and the Greek banking system would collapse.

The banking system in any economy is like the veins and bloodvessels in a body. If the banks stop functioning the economy just withers and dies.

Might the only way to avoid this dreadful choice be if all the Eurozone countries decided to abolish the Euro altogether, simultaneously?

The Euro would thus cease to exist as legal tender anywhere in the world. However there would have to be a period of some months at least when the Euro banknotes could still be exchanged at a fixed rate by the national central banks of the former Eurozone countries.

Of course this again would lead to citizens of weak countries whose new currencies could be expected to devalue wanting to keep their euro notes as long as possible.

This would happen even if the weak countries did establish exchange controls to stop their citizens from all switching their euros into Swiss francs or dollars before they were forcibly changed into depreciating national currencies.

Even then however the Chinese and other worldwide holders of euros would be scrambling to turn their euro reserves into D-marks, and not into drachmae or liras. The effect on Germany would be dire in any case.

So it looks as if they are all stuck with the Euro forever.

They will have no alternative but to go ahead and build a single EU government with a single treasury to issue EU T-bonds. Of course the Germans will still have insufficient fellow-feeling to prop up the spendthrift Greeks, let alone the much more expensive Spaniards and Italians, so the Club med countries will just have to get poorer and poorer.

They will be forced to pay off the bonds they sold to the German and French banks. They will be reduced to satellite (neo-colonial) status. The EuroGendarmes will be there to club protestors into submission.

But this was the plan all along, to bring in the single currency, and once this was accepted, a situation would arise which would stampede the citizens into accepting a single state, or risk seeing all their MONEY melt away in their pockets, and evaporate from their bank accounts.

Torquil

(feel free to circulate)