The euro breakup thrill ride begins

By Felix Salmon
November 9, 2011
talking for months about creating a "core" euro zone with real fiscal union, markets sure as hell didn't go up.  

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It’s important not to read too much into today’s mid-afternoon stock-market wobble. But in the wake of the news that Germany and France have been talking for months about creating a “core” euro zone with real fiscal union, markets sure as hell didn’t go up. And one anonymous diplomat gave a succinct explanation of why:

This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years,” one EU diplomat told Reuters. “This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it.”

I’ll go out on a limb here and guess that the diplomat in question isn’t German. But whoever it is, they have a point. There is no way that the European periphery will go quietly, resigned to their second-tier fate and their third-tier currencies. And without their consent, this idea is going to get very messy, very quickly. Even if it never happens, simply debating it could suffice to cause enough intra-European mistrust and vitriol that the markets simply cease lending to all but the very safest borrowers. And the ECB can’t lend to everybody.

Meanwhile, Silvio Berlusconi has turned himself into a lame duck, and is being as obstructionist as possible with respect to allowing his successor to do his job. In fact, it seems at the moment as though new elections won’t take place before February — which is far too long as far as impatient markets are concerned.

If you haven’t read it yet, you should really check out Mark Carney’s speech from last night in London, on the subject of global liquidity — something he describes as “the Keyser Söze of international finance”.

If you die, the proximate cause of death is always the fact that blood has stopped flowing to the brain. Similarly, if you’re in a crisis, the proximate cause of the crisis is liquidity, or rather the lack of it. You can be insolvent for as long as you like, so long as the money keeps flowing; it’s only when the money stops that things come to a head.

And we’ve reached the point, in Europe, at which the money has stopped flowing. Barclays has already declared that Italy is “beyond the point of no return”, and Greece hasn’t been able to fund its deficits either domestically or in the international markets for ages now. This is what happens in crises: the money stops, and then governments and central banks are faced with a choice. Do they step in, lending freely where private actors fear to tread? That’s the right thing to do if what you’re facing is merely a liquidity problem. But if it’s fundamentally a solvency problem, then layering on extra debt just makes matters worse.

And in Europe, of course, the governments are as likely to be part of the problem as they are to be part of the solution — if there is a solution, which is looking increasingly improbable.

All of which is to say that there are going to be many more days like this. Europe is becoming increasingly unpredictable: the crisis has claimed the scalps of two prime ministers in the past week, and they surely won’t be the last.

Martin Wolf says that the eurozone is unlikely to survive. Paul Krugman is saying the same thing. I’ve been saying it too. But one thing’s for sure: a euro breakup is emphatically not priced in to markets. So fasten your seatbelts: it could come sooner than you think.


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To put it another way:
“Speed has never killed anyone, suddenly becoming stationary…That’s what gets you”

Top Gear

Posted by careful1 | Report as abusive

@Felix Salmon: What will this mean for ordinary people if this actually happens? Is this predictable?
* Debt defaults (internal and external)?
* Banking service shut-downs, and runs on banks?
* Mass unemployment?
* Currency devaluations?
* Commodity supply disruptions?
* Asset price volatility?
* Prolonged political unrest?
Which of the above would be most likely? Might anything else happen?

Personally I still don’t believe that this crisis is irreversible. Now if only Berlusconi can put away his personal pride, and leave with some dignity intact for the good of his country… If he does this, is it not within the realms of possibility that interest rates on Italian bonds would return below 6-7%?

Posted by matthewslyman | Report as abusive

Felix, the crazy thing as far as the stockmarket is concerned:

I followed the Swiss market closely through the shock appreciation of the Franc, where it trade inversely to the currency. The German market is trading almost completely correlated to the EUR, which as far as German exporters are concerned is absurd (their profits rise with a decline in the currency and they are usually not 100% hedged).
What does this tell us? Terror of the overseas investors selling out on EUR weakness? The EUR just a proxy measure for risk affinity? Are there doubts about balance sheet mismatches in case of a EUR breakup or an international market fleeing the German market, leaving it to a domestic investor base that has never liked stocks as investments (less than 9% of Germans own stocks).

Posted by Finster | Report as abusive

Felix, don’t be so sure. Greece may go back to the drachma, and Italy the lira, but the Eurozone will survive and eventually grow again. The reason for this is that European integration is about more than money. It is an idea that has wide support throughout Europe. During the crisis of the past 3 years Estonia joined the Eurozone, and Latvia wants in – even though both countries have had depressions (not recessions but depressions) made worse by their efforts to join the Eurozone.

Posted by Dan85 | Report as abusive

Felix, don’t be so sure. Greece may go back to the drachma, and Italy the lira, but the Eurozone will survive and eventually grow again. The reason for this is that European integration is about more than money. It is an idea that has wide support throughout Europe. During the crisis of the past 3 years Estonia joined the Eurozone, and Latvia wants in – even though both countries have had depressions (not recessions but depressions) made worse by their efforts to join the Eurozone.

Posted by Dan85 | Report as abusive

This guy has been right all along, and has a solid solution: 1/11/09/reality-hits-the-eurozone-finall y/

Posted by sarkozyrocks | Report as abusive

The USA is at least as leveraged as Greece and probably more than Italy. This destruction of the euro is the necessary prelude to a big US devaluation.
We are looking at Great Depression, version 2.0. An internation regime of competitive devaluation and massive currency speculation replacing conventional business investment.

Posted by ChrisHerz | Report as abusive

I would suggest that virtually no bad news is priced into the market right now. After all, despite the fact that US unemployment is at 9%, virtualy the entire Middle East is in turmoil, China’s growth is slowing, and the EU is in deep trouble, the S&P 500 is trading ABOVE where it was the day Bear Stearns went under.

As to the issues enveloping the EU, note that the original impetus for its formation was to prevent another European war, not necessarily to create a fiscal or political entity. Anybody with half a brain could tell you that trying to fold 15-25 countries with different cultures and different languages into a single fiscal and political entity was going to be a rather tenuous proposition at best, and nobody who has studied European history should be least bit suprised at what is currently happening.

Posted by mfw13 | Report as abusive

When Helmut Kohl of Germany and Francois Miterand of France started the process for EU and led the grounds for the Eurozone, there was discussion on whether the unification should go a few steps ahead soon (fiscal unification and central banks extension of role). Both agreed that this would be hard to sell to the electorates, however, both agreed that a future crisis would bring the leaders of the time face to face with the question of full unification and the latter will opt for that.

I am not sure if the EU leaders at this moment have the “weight” necessary to take bold decisions. The electorates are certainly disgruntled with the EU experiment and referendums will certainly lead to the break up of EUzone. You see Democracy can only work when people are “educated”, “informed” and “calm”. And people now are not fully informed and not calm at all. Even in ancient Greece, Athens, where democracy was born, in times of crisis people elected a so called Tyrant. A person with extraordinary authority to take decisions and lead through the crisis. This is what we need now, people with guts. See what is happening in Greece, where spineless politicians are eating the time while Greek people observe astonished, unable to believe how incompetent are the people comprising the political system.

There are solutions for an interim unification which can act as a bridge for a greater unifications (see links below), however i am not sure if we have enough time to enter into such decisions. s/?docid=1424 s/?docid=1380
You see we live through historic moments which will lead to dramatic changes. Even Dan Brown would never imagine to write a book were:

US is battling to resolve its deficit problem and insolvent banks/finance institutions/pension funds while trying to support European Union (in order to save its Money Market Mutual Funds from failing, in order to maintain its largest trading partner, and in order to stop one more Lehman event). And of course is trying to tackle the dilution of its role as the superpower.
EU is facing for the face time the ultimate question: to unite or to divorce. While at the same time tries to save its insolvent banks (which have 5 times the assets of the US banks) and in parallel faces tremendous imbalances between surplus countries and deficit countries.
China is trying to cool down the asset bubbles in order to avoid a burst. But also faces an increasingly aging population and is trying to assess its role as superpower and global lender. Meanwhile their scheme of increasing domestic demand and enlargement of the middle class is not progressing as it was planned and they face internal forces which seek change.
Israel and Palestine are still in “locked horns” position
North Korea is facing tremendous problems while the regime does not want to let go
Iran is armed and US/GCC is increasing the tensions sighting IAEA reports on nuclear weapons
MENA region is boiling following the removal of the previous regimes and the realization that there is no real alternative proposal
Turkey walks the fine line between the geopolitical partner of US/West in the region and the Islamic/Secular model leader of the Islamic World (but they forget that they are not Arabs)
Africa is raising steam (Somalia, Nigeria etc) while at the same time China has entered a colonization scheme similar to what Europe did in US and for almost similar reasons
Japan is been wounded severely by the natural disasters (which followed a lost decade of stagflation) while at the same time this event and others exposed the deeply corrupt nature of it’s political and business elite
India is stumbling while trying walking with it’s “democratic legs”, and Pakistan is not a good neighbor for them or for the Afganistan
Iraq is left on its own devices (more or less) while GCC would like to have this country positioned to keep busy Iran

The pieces are set on the chessboard. What is going to be the next move?

Doha, Qatar

Posted by reuterskostas | Report as abusive

A great article here: pointing out what the eurozone was initially set out to do, how it has failed on so many parts and the conflict between those that have worked with those that haven’t! All in all, pretty much a failed system!

Posted by GraceS88 | Report as abusive

Felix Salmon, you produced Red Herring here. The number of such herrings is growing and they are smelling even more badly since becoming The Doom Predictor is a promise to easy money and fame at a very, very low cost.

The arguments are smelly since in the case of frozen liquidity the ECB has the same mandate as FED in preventing serious market distortions. FED bought how many trillions of US paper? Bank of England also got its part? So the ECB will do it too. A trillion or two of euros will make the ECB on par with the others and, as their example shows, the problems will disappear.

Posted by wirk | Report as abusive

Felix, this tastes more of lice and slime in your soda

Posted by scyth3 | Report as abusive

Forget the euro. Forget the US dollar. Both are riddled in debt and are as worthless as the paper they are written on. There is only one true form of money, and it has been money for thousands of years. The only real money is gold and silver in the form of gold or silver coin or bullion held in your own hands. Take whatever money you have in the bank out of the bank, and buy gold or silver bullion. Bury the bullion in your backyard or put it in a safe deposit box that is not connected to a bank, and you will preserve your wealth through this crisis. Gold and Silver is the only real form of money. It has been money since before the days Jesus Christ walked on the earth. The ECB, The German banks, the French banks, the Italian banks do not have enough gold in their vaults to cover their debts, if they did, they wouldn’t be the position they are in today. They foolishly sold their gold and silver years ago. Their currency is backed by nothing but paper, fresh air and an empty IOU. Gold and Silver are way, way undervalued. Gold and Silver today is on special, buy it by the truckload, and you will preserve your wealth. Go to for more information on how to preserve your wealth through this crisis. BUY GOLD AND SILVER BULLION.

Posted by Couch77 | Report as abusive

The wishful thinking of a typical englishman since day one of the birth of Euro.It will remain a wishfull thinking as the Euro is here to stay strong unlike the Britsh pound that will be constantly devalued and eventually became an ordinary irrelevant currency.

Posted by ektope | Report as abusive

I would like to see ‘a’ Euro survive but not a Euro zone made up of the current members. There will always be too many strains existing as a result of divergent economies and life styles. If Germany, Austria, Holland, Finland and maybe France were to pull out then the Euro could survive ( devalued) for the remaining countries. Germany could remove it’s veto of the ECB printing Euros allowing debt to be purchased. It would of course cost Germany dear as it will be owed a lot of money in the devalued Euro’s but probably not as much as if the entire Euro zone crashes.

If a tightly controlled ‘northern’ Euro zone were created then I could see the UK joining at some future date.

While they are at it could they reform the EU to make it a democratically elected body, much smaller in size and cost and to clean out the enormous amount of waste of money that exists within the current EU. Imagine – an EU that was popular with it’s citizens! Now there’s a thought.

Posted by pavlaki | Report as abusive

@Dan85 – in other words, the Baltics will do anything to join any Western club so that they get as far as they can from Russian influence. Great! That’s 7 million people if all 3 join.

Who else you got?

Posted by johnhhaskell | Report as abusive

@johnhhaskell – that’s 7 million less to join england, living alone and beyond any influence:  /uk-europe-uk-banks-idUKTRE7A863O201111 09

(quote) “An argument presented by the Swedes or the Polish carries far more weight than one that’s presented by the UK at the moment,” said Cummings, Chief Executive of lobby group TheCityUK.”

So what else you got either?

Posted by scyth3 | Report as abusive

I think that countries leaving the Eurozone might be better off. I think the power grab was to give the countries all the money they could borrow, and then they would come under the power of the WTO and the world bank. Then they would lose their freedom to manage their country. I believe that Bill Clinton sold out the United States to these same people and we are reaping the crop sowed by Bill and Hillary. We in the US are now as sick as Greece and Italy, but we are still in denial of the problem.

Posted by fred5407 | Report as abusive

Felix: Krugman, Wolf, yourself, others: As much as we see this as a political and financial crisis, is the key problem that the euro is losing intellectual support? That is, it’s impossible to defend as an idea, even if it might be able to survive in some technical sense?

Posted by mattdebord | Report as abusive

This guy has been right all along on the Eurozone…his analysis and solutions are spot-on. Debate all you want, but this is what is going to happen next: 1/11/09/reality-hits-the-eurozone-finall y/

Posted by sarkozyrocks | Report as abusive

France is now a muslim country so count them out, Germans can’t work anymore overtime and most of Southern Europe is too bust drinking their way through long lunches to care!

Posted by DrJJJJ | Report as abusive

The problem is that no one except China is doing the basics. Sticking money in banks won’t help. Banks must lend money to small businesses that hire most new workers and provide pay checks, thereby creating new customers. There is no jobless recovery because a jobless recovery would be a customerless recovery, and that doesn’t work. China’s 12th Five Year Plan (2011-2015) develops central and western provinces with infrastructure and JOBS and PAYCHECKS to create CUSTOMERS and run their economy and pay TAXES that will yield a $500 billion internal budget SURPLUS for 2011. China planned to reduce its trade surplus by 20% but foreign natural disasters kept the reduction to 10%. Infrastructure plans set the growth rate to fall to 9.0% until USE of infrastructure would cause the growth rate to rise again, but foreign natural disasters have kept domestic growth at 9.4%. The point is that few read Xinhua to understand the technocrats with degrees in science, engineering, technology, business, and economics who run China and see which tactics might work in the West. The US prefers politicians, preachers, and propagandists. Fortunately, the fall of Greece will bring down Italy, the EU, and the US into a depression that will last a decade, and the West can study China’s successes and determine which parts of China’s system may work in the West as it tries to recover.

Posted by alanchristopher | Report as abusive

France is a muslim state now so they should be able to get some help and further influence from the middle east! I wouldn’t want to be a French women about now!

Posted by DrJJJJ | Report as abusive