Felix Salmon

How the euro might collapse

By Felix Salmon
May 20, 2010

I had a little three-minute fantasia this morning on Radio 4 in the UK; if you prefer text to audio, here you go. The idea was to give an idea of one way in which the euro might fall apart, but I had no idea, when I recorded it, that markets would plunge again today.

August 18, 2010:

Markets around the world plunged on Wednesday, after Spain announced that the cost of bailing out its beleaguered mortgage lenders would amount to more than 250 billion euros. The country was immediately downgraded by both Standard & Poor’s and Moody’s, triggering fears of default or devaluation in both Spain and Portugal. Stocks fall by more than 5% in all major markets, including the US.

August 19, 2010:

Chancellor Angela Merkel of Germany, in an unprecedented joint public appearance with Jean-Claude Trichet, the head of the European Central Bank, railed against “speculators and hedge funds” who were damaging European unity and threatening the viability of the common currency. She said that Europe would provide up to 500 billion euros in support of Spain, Portugal, and Greece, to help them bail out their banks during a period when investors have simply stopped lending them any new money.

August 22, 2010:

In the largest set of coordinated demonstrations since the run-up to the war in Iraq, angry voters and opposition parties across Europe came out in their millions, protesting the hundreds of billions of dollars being spent on southern European countries, and the painful austerity measures being demanded of Greece, Spain, and Portugal by the IMF.

Opinion polls show that an overwhelming majority of Eurozone members oppose the current bailout plans, both in northern European countries like Germany, which don’t want to see their money spent abroad, and in southern European countries like Greece and Spain, which refuse to be told how to run their countries by Brussels bureaucrats and the IMF.

The riot photos from Greece are becoming depressingly familiar, but now we’re seeing riots across Germany, too.

August 23, 2010:

As markets continued to plunge around the world today on civil unrest across Europe, governing coalitions across the continent broke apart, with no parties seeing any political upside in supporting the most unpopular policy that has ever been implemented in European history. Even Angela Merkel started backtracking from her earlier statements, saying that no democracy could unilaterally act against its citizens’ wishes.

August 24, 2010:

A solution, of sorts, was found to the European crisis today, when the governments of Greece, Spain, Portugal and Italy announced that they would no longer accept EU or IMF funds as part of the bailout program, and would solve their problems on their own. The joint statement was taken by markets as tantamount to default, since none of the four countries has access to the liquidity needed to roll over their debts.

August 25, 2010::

Greece has announced a debt restructuring that will push back the maturity of its bonds by three years.

It will swap existing debt for new bonds denominated in New Drachmas, which the Greek government is introducing at a 1-to-1 exchange rate but which are already trading in the “grey market” at just 50 euro cents each.

September 13, 2010:

Markets were shocked once again today as France joined, at the last minute, the joint restructuring offer from Italy, Spain, and Portugal. All four countries are offering to swap their old euro-denominated debt for new obligations denominated in a currency they’re calling “neuros”. Other eurozone countries have indicated that they, too, will leave the euro for the neuro, cutting their debt at a stroke. In the grey market, the neuro is already trading at 75 euro cents, while the new drachma is holding steady at 45 euro cents.

Today was the last day of the euro as we knew it for a decade: Europe is returning to a system of multiple floating currencies. And that means that political ties are much weaker, too. With the death of the euro, the future of the European Union itself looks very uncertain.

This is not a prediction, it’s just one way of many in which things could go wrong. There’s always a worst-case scenario. And although I didn’t have time to spell things out here, this really is a worst-case scenario, and would cause legal chaos with respect to the redenomination of assets and liabilities in what might be called the neurozone.

Which means that questions like this one, which I got via email this morning, are simply unanswerable:

What happens to the euros which I have in my travel wallet (or under the mattress or where ever) if the euro splits into various neuros? More importantly, what happens to euros held by a British bank? Answer needed!

Most likely, in this kind of a scenario, the euros would transform themselves into the currency of whatever country they’re on deposit in. You can see where the flight-to-quality trade comes from: cash flows away from euro-periphery banks and into German banks, and away from euros and into dollars, lest it end up forcibly converted into something else. Physical euros should be pretty safe: you could probably convert them into neuros at an advantageous exchange rate, assuming that it’s the weaker countries which leave the eurozone, rather than Germany and a few others deciding that they’re going to create a smaller, stronger, super-euro.

Returning back to reality, the euro itself could still fall further, especially if questions over its long-term survival continue to be raised. And all this uncertainty is bad for assets generally around the world. Expect lots more volatility going forwards.

31 comments so far | RSS Comments RSS

Oddly enough, one article I read earlier today was Charlemagne’s latest on the Economist’s web site:

http://www.economist.com/blogs/charlemag ne/2010/05/euro_crisis_5

He starts off by mentioning how the BBC approached him for their little “war game”, and how he said “no”. He follows up with:

“They found someone else, it seems, and here is their effort, complete with Hammer House of Horror sound effects.”

Now I know who the someone else was….

I’m also starting to get the feeling that I’m spending too much time today reading financial blogs.

Posted by aTree | Report as abusive

I read a different blog the other day on the subject of worst case scenarios, and how they aren’t productive at all.

You say this isn’t a prediction, just one way things could go. Other than exciting fiction, what’s the value of a story such as this?

Posted by drewbie | Report as abusive

He’s basically giving you an idea of what to look for on the road to ruin, drewbie. IF these things start happening, there’s real trouble ahead. That’s all scenarios are…things to be watching for and to try to do or not to do. Think of it as one possible result in a massive chess game.

==bob D

Posted by REDruin | Report as abusive

Also, there’s a difference between worse case PREDICTIONS and worst-case SCENARIOS. Felix isn’t predicting anything…he’s offering a scenario. Doomsayers are useless, trying to spread fear and hype. Planning for a doomsday scenario, on the other hand, is actually useful.

==bob D

Posted by REDruin | Report as abusive

There are plenty of worse worst-case-scenarios.
There could be a european war – theres one.

This is plain doom served up on a plate according to BBC tastes.

It’s ironic there is even an Iraq War angle worked in – for the Today programme – who’s sexing things up now?

Posted by lubumbashi | Report as abusive

Felix, you are a badass!

The euro cannot hold indefinitely in its present form, and your radio sketch will have future historical value!

Posted by DanHess | Report as abusive

Highly plausible, except for the timing. I think it will take longer to burn through the $750bn support fund before the attempt to hold back the tide is finally abandoned.

Also Greece announcing they’d rather reschedule after all and throw in the Euro tide might well be the trigger before the Spanish own up.

Posted by Alisdair | Report as abusive

Take an opposite scenario: people realize, that euro is oversold now, speculation starts going the other direction, US produces more bad reports and no longer seem doing so much better than Europe, governments and ECB backs up euro. Financial reform, some other future plans by Mr. Obama widens deficit, Europe successfully controls its own… I’m lazy to fantasize more, sorry. Anyway, finally, Euro gets back to 1.5 to USD, S&P and Moody’s are downgraded to junk by world.

Obviously, Felix, neither scenario is reasonable.
That’s the biggest problem with you article, imho. Except the hate for euro… do you have any “put”s on it that expire tomorrow? :)

Posted by Yakov72 | Report as abusive

If one would make a movie of this the leading role would go to mickey mouse.
Another attempt of the media to attack the euro. Which euroshorting american bank is paying you this time?

Posted by bart | Report as abusive

Here is my Response

Let me teak your scenario.

‘August 18, 2010:

Markets around the world plunged on Wednesday, after Spain announced that the cost of bailing out its beleaguered mortgage lenders would amount to more than 250 billion euros, triggering fears of default or devaluation in both Spain and Portugal. Stocks fall by more than 5% in all major markets, including the US.’

Everything else the same. Viola just as plausible.

Though you are right, a downgrade could cause damage that would not have been caused otherwise in the right situation. Greece was not that situation in my opinion.

Posted by RHS | Report as abusive

The monopoly banks of Europe, using their European Central Bank, created this current financial crisis in Europe by intentional excessive lending to the subprime States in the voluntary European Union, thereby making the borrower slave to the lender.

Europe has a common currency, the euro, created by the European Central Bank, which is controlled by the monopoly banks in Europe, but the centralist government, the European Union, does not have the power to tax or control budgetary spending of the free, sovereign, independent States in this voluntary Union.

Now that the subprime nations are slaves to the lender, the European Central Bank will change the European Union into a compulsory Union of colonies under their centralist government with the power to collect taxes from the citizens and dictate budgetary spending by each State (colony).

It is the same song second verse of the U.S. monopoly banks’ subprime lending ploy that allowed the huge U.S. monopoly banks, using their own banking club (the Federal Reserve), to bankrupt and gain control of much of their banking competition (the shadow banking system) in the past three years. The current so-called financial reform Bill will control their remaining banking competition.

In Europe, the major cut in spending will be the replacing of each State’s separate military power with a central European army, allowing taxes to be collected without so much resistance, which will help balance the budgets of these colonies.

The collection of taxes will strengthen the euro and the centralist government, while greatly reducing the power of each State and move the world one more major step toward a one world currency, controlled by the monopoly banks.

Since central banks create money out of thin air with digital computer entries, a digital one world money system should logically follow with implanted computer chips for the citizens, which will end all the identity theft.

Posted by jebahoula | Report as abusive

Come on any mildly informed and curious person knows that Germany will lead a block of the 10 strongest EU economies in a revised Europe. And watch for a paperless currency to be recommended. This union will be much more cohesive militarily also. It will happen quickly/

Posted by iknowthefuture | Report as abusive

The euro is rallying, my friend


Posted by STORYBURNcom2 | Report as abusive

You can have million reasons. In short China has defeated Europe and USA in economy.

China a third world country a few years ago has beat them hollow. Now they are looking for reasons.

every month the western leaders are in china begging for loan and mercy. shameful.

Dumb western nations.

Posted by NoImport911 | Report as abusive

There should be no bailout for financial institutions. Instead, simply provide 100k /USD or EUR/ insurance on savings and 250k on pension funds. Let the rest be wiped out and tax on wealth, i.e. capial and non-primary property, at maximum bracket. Yes, the financial markets may shut for a blip, but the economy will not. This is a way to let social strain loose and recover the economy. Instead, now we have one prolonged recession, which eventually will become depression.

Posted by Ananke | Report as abusive

If I had a Euro for every blogger making it sound like the Euro is more likely to crash than the ultra-obese U.S. Dollar, I’d be wringing oil out of my deposits in the Cayman Islands.

Posted by HBC | Report as abusive

LOL for thinking merkel will still be in power in august 2010. otherwise, good work.

Posted by timmy1028 | Report as abusive

“… but now we’re seeing riots across Germany, too.”

You don’t know the Germans….

Posted by Talleyrand | Report as abusive

September 13, 2010:

Markets were shocked once again today as France joined, at the last minute, the joint restructuring offer from Italy, Spain, and Portugal. All four countries are offering to swap their old euro-denominated debt for new obligations denominated in a currency they’re calling “Stick, leaf and Rock”. Other eurozone countries have indicated that they, too, will leave the euro for the Stick leaf Currency, cutting their debt at a stroke. In the grey market, the Stick is already trading at 75 euro cents, while the new rock currency is holding steady at 45 leaf cents.

Spokes person informal was quoted as “Fortunately that now that the currency has been replaced by sticks, leaf and rock we are all now wealthy and can spend all our time making documentaries about each other”. Environmentalist David Suzuki’s ghost writer is said to be “outraged”.

Posted by ghostwriter45 | Report as abusive

It was a bright cold day in April, and the clocks were striking thirteen…

Posted by hedger | Report as abusive

The real question Felix is what is a counter attack possible for EU and ECB? Market first rightly demanded for a Trillion Dollar bailout. Once they got it, it is now the next question – how will these countries pay this huge debt when currency wise they are so straight jacketed.

I think some time solution can as simple as further devaluation of Euro. With Oil going down and deflation scare everywhere so rampant, let Euro keep going down. As the Global economy holds (hypothesis), European Exports coupled with internal political adjustments basically saves Euro. That is very much possible too.

Or are we looking for another ‘shock and awe II’ here? What can be that apart from pure break up of Euro? Are we saying there are no such shots? Further integration? But politically that seems really, really hard…

Posted by umeshgeeta | Report as abusive

Your worst case scenario is a particularly bad one. German’s did not come out to riot when a 750 billion euro rescue was approved a few weeks ago… maybe it was something along the lines that a lower euro makes exports cheaper and they happen to be the biggest exporter in the world.

Posted by elbulgarro | Report as abusive


Posted by stoli007 | Report as abusive

Unfortunately the nightmare is not in the Eurozone.
Only the blind do not see… The US dollar is living on the laurels of the old USA, winner of the second world war. The USA economy is the one to look at.
Think if America has any condition in the next 5 years to have an economy that is not running a deficit. What kind of value the dollar really have? You are right, psychological value. If China raises the value of the yuan what will happen next is more US deficit.
The population is aging, the technology leadership is gone in most areas, no real savings…Financed by the chinese socialist government!!!

Posted by Jose_Ernesto | Report as abusive

You’re crazy! This is nothing but overblown propaganda. Spain and Portugal are nowhere near default, and Greece is not going to sink the Euro, or the world economy.

Posted by HemiHead66 | Report as abusive

The Euro will come a better institution after this crisis.
Europeans will have improve their system. Poorer European countries will have to develop real strategies to improve their economies….
Chances are the Euro will become a more important currency than the US dollar in the years to come. It is a question of growing more mature.

The American economic problems are much more difficult to solve.

Posted by Jose_Ernesto | Report as abusive

The Euro will become a better institution after this crisis.
Europeans will have to improve their economic system and institutions. Poorer European countries will have to develop real strategies to improve their economies…
Chances are the Euro will become a more important currency than the US Dollar in the years to come. It is a question of becoming more mature.

The American Economic Problems are much more difficult to solve. In the next five years we will have a better understanding of what might happen to the USA.

Posted by Jose_Ernesto | Report as abusive

Your comment (submitted on Fri, 21 May 2010 12:36:48 GMT) will appear here shortly. We welcome comments that advance the story directly or with relevant tangential information.

We try not to publish comments that we think are offensive or appear to pass you off as another person, and we will be conservative if comments may be considered libelous. We may block or remove comments that use capital letters excessively.

Posted by linqingshan | Report as abusive

I’ve been listening to people writing off the Euro as a long-term bet almost since its inception. It’s a young currency, the child of an experimental union that has yet to find enough common ground to consider living together under one roof. Only closer political union will stabilise the Euro for the long haul and that becomes a more remote possibility the larger the EU gets.

We may have to live with the current volatility to some degree for the foreseeable future, but tighter regulation of the markets is a pre-requisite for ensuring stability and avoiding a repeat of the 2008 crash.

And, Felix . . . for the most part, the only rioting that happens in Germany is instigated by immigrants.

Posted by Hewson | Report as abusive

Re: forecast for August 22, Germany.

Well, I don´t know about riots here. But you can already detect a strong degree of discontent across a wide spectrum of German society.

Interestingly, groups supported by the Left party, and trade unionists are calling for a national protest on June 12th in Stuttgart and Berlin, with speakers from Greece.

This could become a summer of Merkel´s discontent that can only be made glorious by getting the Deutschmark back.

Posted by Volker | Report as abusive

I think the €750bn bailout might be a bluff. I seriously doubt they have the capital available to pull that off, unless of course the ECB turns on the printing presses.

And yes they do want to devalue the euro, but that’s not the ECB’s policy, and when Germany joined the EMU they told the German people that the euro would be a stable currency, so that their savings would remain intact. Ze Germans have lost everything to hyperinflation twice already, they don’t want to go through that ordeal again.

This Greek crisis gave them the opportunity to devalue the euro without severe political reprecussions as they can blame the Greeks. Straightforward quantative easing would not have been as well received.

Why devalue the euro? Haven’t you been paying attention, we’re on a race to the bottom. Just look at a 10-20 year graph of precious metal and commodity prices in any fiat currency. A euro devaluation would make the interest payments in euro debts much cheaper, and it would make the euro more competitive as a currency, maybe leading to more exports for Germany, who just got overtaken by China as the worlds biggest exporter.

However as Germans have lots of savings, they would be wiped out, or at least badly bruised in the process. At best, Merkel is buying them time to get rid of their euros.

The euro will continue to devalue, gold will continue to go up, because it must do so, or else Greece, Portugal, Spain, Italy, Ireland, France etc. will have problems paying their interest payments on euro debts on time, and must then default.

We’re playing a game of default or inflate.

Posted by johan404 | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/