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Thread: Eurozone: Possible Scenario

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    Politics.ie Member seabhcan's Avatar
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    Default Eurozone Breakup: Possible Scenario

    I have always been skeptical of the possibility of a Eurozone breakup because I couldn't see a plausible mechanism which would bring it about, or any rational reason for any nation to pull out.

    However, for a while now the German leadership has not been behaving completely rationally.

    I thought of one way the show could spiral out of control and lead to a breakup. Here it is:

    An Italian default, and a refusal (or hesitation) of the ECB to stand over the debts, leads to a run on the French banking system (which owns huge amounts of Italian bonds). Queues form outside the banks in cities across France, and leading into the election, Sarkozy tried to calm the situation by saying France will guarantee all deposits.

    Loose talk about France's inability to do so given the sums involved, and negative German comments makes the situation worse. The media goes into overdrive and the bank run accelerates.

    The french government decides to quietly bypass the ECB (which is prevented from acting by the Germans) and print its own Euros to ensure no-one loses cash.

    But it is also running into a German election, and the news leaks. The German media and politicians freak out and stories circulate about a wave of inflation due to the French illegal printing of Euros. Some candidate in Germany foolishly says he would close the borders if the situation gets worse.

    This leads to fears that Germany will end the free movement of capital, and money does start to pour out of the rest of the EU and flood into Germany, in anticipation of a German euro exit. On exit, Germany, it is thought, would convert all euro in its borders into D-Marks, which would rise in value, making profit for those who manage to get their money to Germany on time. Banks in every state face collapse.

    One by one, EU states impose emergency 'temporary' capital controls preventing money being transferred out. Some countries announce they will follow France and print new Euros to ensure their banks can honor deposits during the crisis.

    Stalemate is achieved for a while, trade becomes difficult due to capital controls and the uncertainty of what 'euros' come from where, and whether they are worth anything in other states. Shipments of critical goods, oil, etc, are delayed.

    Many summits and conferences are called, but no decisions are taken. Finally, some country announces they will split altogether and reprint their own currency. After that, everyone is forced to act.
    Last edited by seabhcan; 26th November 2011 at 04:57 PM.

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    Politics.ie Member olli rehn's Avatar
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    And they all lived happily ever after....

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    Politics.ie Member westernyelp's Avatar
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    What is the point here? We can all make up a scenario with a hundred variables

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    Politics.ie Member seabhcan's Avatar
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    Thread title should have read "Eurozone Breakup: Possible Scenario"

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    Quote Originally Posted by seabhcan View Post
    Queues form outside the banks in cities across France, and leading into the election, Sarkozy tried to calm the situation by saying France will guarantee all deposits.
    To prevent queues, you just need to guarantee a much smaller amount. Lenihan should never have guaranteed 100% of deposits with no upper limit.

    A 100% guarantee for the first 50k on deposit should eliminate bank queues. That assumes that it is believed, but a 50k guarantee is much more believable than an unlimited one.

    Loose talk about France's inability to do so given the sums involved, and negative German comments makes the situation worse. The media goes into overdrive and the bank run accelerates.
    Few countries can absorb a 100% guarantee.

    The french government decides to quietly bypass the ECB (which is prevented from acting by the Germans) and print its own Euros to ensure no-one loses cash.
    As in print paper Euros? I assume that the only electronic Euros that exist are monitored by the ECB directly.

    They could print paper, but most value is electronic.

    Also, that is basically state sponsored counterfeiting ... they would kill confidence in the Euro.

    This leads to fears that Germany will end the free movement of capital, and money does start to pour out of the rest of the EU and flood into Germany, in anticipation of a German euro exit.
    Assuming France circumvented the ECB, then that would be a reasonable fear.

    On exit, Germany, it is thought, would convert all euro in its borders into D-Marks, which would rise in value, making profit for those who manage to get their money to Germany on time. Banks in every state face collapse.
    Maybe. I think they would impose a residency requirement. Something like, any German resident's account would be converted to DM and in addition there would be a EUR 1000 per person limit for cash Euros.

    Also, in theory, if extensive enough (so citizens of EU countries only trust money in German banks), that would cause the new DM to replace the Euro as currency. The bundesbank would become the new ECB. Ofc, other countries wouldn't accept that.

    Stalemate is achieved for a while, trade becomes difficult due to capital controls and the uncertainty of what 'euros' come from where, and whether they are worth anything in other states. Shipments of critical goods, oil, etc, are delayed.
    This effectively creates Euros from each country, so would effectively be separate currencies.

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