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June 02, 2005

Euro Breakup?

The euro has fallen markedly on the results of the two referendums (Yippee! Pay rise! Those of us who get paid in $ but live in euros have just had a 10% pay rise in the past few weeks) and Stern  has been asking whether it was a good thing...and also making the odd sly reference to the fact that it might break up.

He told them high-debt states were unlikely to leave the euro-zone by choice since the price would be too high. But a hard-core led by Germany might reap some benefit from breaking away. Mr Fels said yesterday that Europe was now "on a slippery slope toward disintegration and instability. The risk of a euro wreckage has risen significantly.''

Stern advised readers to look carefully at their euro bank notes: the number series on German issue notes start with the letter "X", while Italian notes start with "S".

This is a little silly as even if it does break up they’re not going to worry about where the bank note was issued....currency in circulation is such a tiny part of the total money supply that it is almost irrelevant. However, for those who want to know, from Wikipedia:

National identification codes
Code Country Checksum
Not Used
Not Used
(United Kingdom)

Now, it is most unlikely that the country of issue of a note will ever make the blindest bit of difference. Well, it might in one way actually, in the theory and madness of crowds manner. If the general public starts to believe that a break up is coming then they might well start to distinguish between the different notes. As I say, I think this would be irrational, but it still might (very unlikely but it might) happen, and if it does this would mean that the breakdown would be inevitable. If we start to see a spread in the relative values of the different notes then that means the populace has lost their trust in the money and no fiat currency can survive that.

So there you have it, the canary in the coal mine. Would anyone travelling to Germany this summer let us know if people are in fact checking the country of issue of notes?

June 2, 2005 in European Union | Permalink


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Tracked on Jun 2, 2005 1:38:49 PM


Anatomy of euro break up:

1.-Take a peripheric euro country in bad economic shape:
Spain (7% c.a. deficit and growing+housing boom)
or Portugal (6,8% budget deficit)
or Italy (4% budget deficit+recession)
2.-Add a serious economic slowdown.
3.-Spreads between public debt of this countries and those of Germany or France start to widen.
4.-Credit crunch+despair at home
5-Ka boom

Posted by: Ed | Jun 2, 2005 5:03:17 PM

"If we start to see a spread in the relative values of the different notes then that means the populace has lost their trust in the money and no fiat currency can survive that."

No, the spread won't come in the notes. Really this whole issue has already been run through in the liquidity trap debate. The spread will come, and is already here in the sovereign bonds.

Incidentally the language they are quoting has been culled from Fels GEF articles, I'm sure he never said anything like this, although it seems there was a meeting, and he probably was there. The interesting thing that is in Stern is that the German lower house has already taken legal advice on the possibilities of leaving.

The most likely bet is that the high debt states will be forced out by the growing spreads and the cost of funding this. I don't think Germany will walk. This is going to be messy when it comes, and will of course place a huge strain on the dollar. No fun for anyone. Although maybe the Chinese will use this as a good opportunity to offload all the US Treasuries :).

I have outlined a kind of break-up scenario in the thread comments to this post.


Have a nice day :).

Posted by: edward | Jun 2, 2005 6:51:57 PM

Tim, have you just come?

Posted by: Alex | Jun 3, 2005 11:03:10 AM

Tim, Sweden and the UK are not in the Euro zone, so your table in your June 2 article is incorrect and misleading.
- mario

Tim adds: Nor is Denmark of course. I left out an explanation when I stole the chart from Wikipedia. The countries that are in brackets are not euro-zone members, but those letters are reserved for them.

Posted by: mario | Jun 6, 2005 2:05:28 PM