Let’s assume that the members of Euro zone all agreed that it would end in 18 months time with each country getting its own currency.

What process could be put in place to allow this to happen without causing of lots instability?

  • $\begingroup$ What kind of "instability" do you mean? Could you explain. $\endgroup$ Dec 30 '14 at 17:05
  • $\begingroup$ @Mathematician, runs on banks to get the money out in "hard" euros so it can be paid into a bank in a different country for example. Or big swing in interest rates governments must pay to sell bonds. $\endgroup$ Dec 30 '14 at 17:08
  • $\begingroup$ Why would there be a run on banks if there was an 18 month notice of the conversion? Moreover, there is no such thing as a "hard" Euro. When the conversion to the Euros took place, the conversion rate was fixed (more or less) and written into contracts as such, so that no arbitrage opportunities existed. There was no run on banks or any "catastrophe" you seem to envision. $\endgroup$
    – rocinante
    Dec 30 '14 at 18:23
  • $\begingroup$ @rocinante, Would you like all of your savings in the Greek currency? $\endgroup$ Dec 30 '14 at 18:37
  • 2
    $\begingroup$ @rocinante, but it stops being fixed on the day that the Euro end.... $\endgroup$ Dec 30 '14 at 20:34

No Time To Argue

Most importantly, there cannot be an "18 months period of notice". Tt has to be decided suddenly and there cannot be any period in which individuals could respond to the new plan by withdrawing their money and moving cash from one of the member countries to any of the others.

New Currencies

Each country has to have its own currency. These currencies should be free floating against each other, which on the other hand means that some will value up and some down. That is, Germany's new currency will probably value up against whatever Greece will have.

Capital Controls

Therefore, it will be of higher value to have your Euro exchanged for German money than for Greek money. Any bank account will have to immediately be translated into local currency. Also, no one will be allowed to move cash Euro between the member countries.

One way to immediately establish the new currency would be to simply stamp the old money with country specific stamps.


Note that Greek's new finance minister implied that their train of thoughts follows exactly these lines of thinking [my own translation]:

Greece is not going to leave the currency union, as it cannot go back to the path of development on which it was on, hadn't it joined the union. An exit would lead to chaos in any case: For the moment, there is no new Greek currency as a new Drachm. Preparations for the introduction of such a currency would take months and would have the same effect as announcing a depreciation several months in advance. But you can only have a depreciation over night and unexpectedly, otherwise there are massive movements of capital flight/export.

From this german article:

Die Währungsunion verlassen soll Griechenland nach den Worten von Varoufakis aber in keinem Fall. Denn damit könne das Land nicht auf den Entwicklungspfad zurückkehren, den es ohne Eintritt in den Euroraum genommen hätte. Ein Austritt habe auf jeden Fall Chaos zur Folge. Denn gegenwärtig gebe es keine griechische Währung wie eine neue Drachme. Vorbereitungen für die Einführung einer solchen Währung würden Monate dauern und hätten die gleiche Wirkung wie die Ankündigung einer Abwertung mehrere Monate im Voraus. Doch eine Abwertung könne es immer nur über Nacht und unerwartet geben, sonst gebe es riesige Bewegungen zum Kapitalexport, warnt er.

  • $\begingroup$ Is is possible for the EU to decide anything without arguing for a long time? $\endgroup$ Jan 27 '15 at 16:23
  • $\begingroup$ The solution would be highly undemocratic. Thats the problem. $\endgroup$
    – FooBar
    Jan 27 '15 at 16:24
  • $\begingroup$ How would stamping currency work for balances in bank accounts? Is it based on where the bank is headquartered? How about mortgages, would that depend on where the house is, the branch you borrowed from, the bank you took it out from? What if another ban bought your loan and that was in a different country from the one that you borrowed the money initially from? That all seems very finicky. $\endgroup$
    – BKay
    Jan 30 '15 at 16:42
  • $\begingroup$ @BKay the point is "Thats how you can quickly create new currency (cash) without having it printed ex ante (and people knowing about it), not that the exchange rate would be 1:1. $\endgroup$
    – FooBar
    Jan 30 '15 at 18:25
  • $\begingroup$ I wonder what would happen to the TARGET2 balances between the central banks... $\endgroup$
    – Corvus
    Jan 31 '15 at 8:47

People have argued that if the rich countries (sometimes just Germany) left the Euro the resulting dislocations would be much smaller:

German departure would be less disruptive than Grexit for three reasons.

First , a Greek devaluation would trigger capital flight from the next weakest country – Spain, then Italy and France. Germany would not create such domino effects. Once the Deutschemark was restored and revalued, there would not be a “next strongest” country to attract capital flight. Of course, some people might still send their money from Italy or France to Germany, to speculate on further revaluation, but that would be no different from investment flows out of Europe at present into dollars, pounds or Swiss francs.

Second, and most crucially, the euro zone would become a more credible and coherent unit without Germany. Liberated from German obstruction, the ECB would be able to follow the examples of the U.S., Japanese, British and Swiss central banks, using quantitative easing to bring down interest rates to zero at the short end and to around 2 percent on long-term bonds. Just as important, the euro governments could finally form a genuine fiscal union, using the entire fiscal capacity of the euro zone to back jointly guaranteed eurobonds. The euro zone could then be treated again as a single economic unit, comparable to the U.S., Japan or Britain – and in terms of key fiscal ratios it would score well. Public deficits in euroland ex Germany were 5.3 percent of GDP in 2011, according to the IMF, compared with roughly 9 percent in Britain and 10 percent in the U.S. and Japan. Gross debt (including financial bailouts) was 90.4 percent of GDP, against 98 percent, 103 percent and 205 percent in Britain, the U.S. and Japan, respectively. Trade deficits were much smaller than in Britain or the U.S. In short, euroland without Germany would be far from bankrupt – and the key reason for the euro crisis isn’t lack of competitiveness but Germany’s refusal to mutualize and monetize public debts.

Third, a euro break-up caused by Germany withdrawing would be far less chaotic from a legal standpoint than a break-down in which the euro disintegrated as weak countries were pushed out. The euro without Germany would remain a legal currency, governed by the same treaties as before. International contracts in euros would be legally unaffected, but simply devalued in terms of new German marks or dollars, just as British contracts were devalued when the pound fell from $2 to $1.40 from 2008 to 2009. Only contracts within Germany governed by German domestic law, for example retail bank deposits and wage deals, would be redenominated into marks. The German government would face no legal challenge if it decided to save money by repaying bonds in devalued euros (as specified in the contract) instead of converting them into marks (as speculative investors might hope).

A German exit from the euro could be relatively easy By Anatole Kaletsky

IU.eu: Are there any other ways out of the current mess?

Gloy: Yes, I think the least painful way out is for the major creditor countries—Germany and the Netherlands—to leave the euro first, before everything else crumbles.

These two countries could create a new currency, called the neuro, or Northern Euro, for example. This would make German savers happy, while taking the pressure off the remaining members of the single currency. Over time the neuro would probably appreciate, and holders of the euro would be free to switch some of their assets into it.

IU.eu: How likely is this to occur?

Gloy: Given the current stance of EU politicians and central bankers, it’s very unlikely. But it’s the least worst of the outcomes, by far.

From Euro To Neuro?

But are there any modern examples of currency unions breaking up in an orderly manner with minimal economic disruption? I can think of some currency pegs that ended without major harm but I can't think of any actual unions that ended without doing so. The rubble union dissolving might not have been a huge deal but only because the other changes to the affected countries were enormous. Maybe the dissolution of the Scandinavian Monetary Union in 1914 would qualify but WWI loomed large in that decision. War, financial crises, and depression do see to be the most frequent fellow travelers with dissolution of currency unions. Perhaps that's not because dissolution is horrendous so much as it is a high risk, relatively low reward strategy that is only worth trying when things are already terrible.


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