Investment experts at Deutsche Bank now feel that a collapse of the common currency is “a very likely scenario.” German companies are preparing themselves for the possibility that their business contacts in Madrid and Barcelona could soon be paying with pesetas again. And in Italy, former Prime Minister Silvio Berlusconi is thinking of running a new election campaign, possibly this year, on a return-to-the-lira platform.
Nothing seems impossible anymore, not even a scenario in which all members of the currency zone dust off their old coins and bills — bidding farewell to the euro, and instead welcoming back the guilder, deutsche mark and drachma.
It would be a dream for nationalist politicians, and a nightmare for the economy. Everything that has grown together in two decades of euro history would have to be painstakingly torn apart. Millions of contracts, business relationships and partnerships would have to be reassessed, while thousands of companies would need protection from bankruptcy. All of Europe would plunge into a deep recession
This article is surely slightly off target. Europe lived with multiple currencies before and could do so again. Moreover, the more likely scenario is the Euro retreating to a ‘heartland’ of Benelux, France and Germany.
The more serious issue would surely be countries defaulting on their debts. Greece, Spain, Cyprus, Portugal, are all under the water with regard to capital repayments. Banks in other countries would face having to write off debts and rebalance their books, which would depress economic activity. Even so I wonder about the prediction of ‘deep recession’. As with climate change, one wonders at the pronouncements of apocalyptic gloom from those who imagine that there is only one way of doing things.
Reversion to “local” currencies will give a perfect, and probably irresistible, opportunity for the various governments to inflate their way out of some of the debt by selecting extremely weak exchange rates. That will have global consequences, all bad.
APB: Yes, but flexible exhange rates can restore competitiveness and thus encourage trade.