The Future of the Euro

On the afternoon that marks the beginning of the end of the Berlusconi era in Italy,  Gideon Rachman’s piece in today’s FT seems no more than an acknowledgement of the realities now facing us.

37 replies on “The Future of the Euro”

(more) On Reality (h/t a little irelander on a previous thread)

Looks like Barry Eichengreen bin reading Arthur Koestler …

Here’s where the political cover comes into play. Merkel and Sarkozy need to make the case that if the euro is to become a normal currency, Europe needs a normal central bank – one that does not merely target inflation like an automaton, but that also understands its responsibilities as a lender of last resort.

On Gideon Rachman

As Minister Shatter put it to the ‘precious’ poltroon of eight_tripleA generals – Declare your interests.

Gideon Rachman is a bit of a clown. Very hard to call the volatile international political scene when one is so tied to the ancient regime.

I don’t think the situation is especially predictable anymore. It is a real pity that the IMF is an equal member of the ‘troika’ , as it hampers their rising above the situation. Similarily the US domestic dischord clearly limits their ‘moral authority’.

It is quite certain that Italy has been sent into a self fulfilling debt spiral by the antics of last week – and if they don’t get official funding – there’s going to be a Financial Stability catastrophe. This is not some mere currency crisis, nor isolated sovereign debt…Ez sovereign debt is considered ultra safe, and in many bank’s tier 1 capital…absent BRICs+US+IMF joining up…my hope is with ET as the LOLR

The increasingly plausible disintegration of the eurozone calls for adequate preparation for the worst on the part of the Irish State. The Taoiseach’s declaration today that he “does not contemplate” the end of the euro is not an acceptable or a responsible policy for the Government.

In particular, has the Department of Finance and the Central Bank printed an emergency reserve of punts in case the euro collapses? If not, why not? If not, what plans has the department should a new currency be needed in this country?

Given the recent €3.6 billion slip up by the DoF and the NTMA, it cannot be taken for granted that the DoF has taken appropriate steps to ensure the survival of the money supply in Ireland if there is a breakup of the eurozone. We need immediate action and clarification from the Department about the state of readiness of Ireland to face such an event.

Has anyone asked yet?

Indeed a political project, but In Europe political decision making doesn’t work. It was fine for countries like Ireland when there was free money, but now the governance mechanisms are overloaded.

Similarly the ECB has ineffective governance mechanisms, e.g. see this useful article:

The (unspoken) maxim of ‘we’ll all muddle on without saying what we mean’ works for neither politics, nor economics.


Ireland could leave the Eurozone, but wouldn’t be able to forcibly redenominate debts/deposits into punts. Leaving aside the (potentially intractable) operational issues, Bunreacht gives v strong property rights.

Gideon Rachman: “…it is time to think not about how to save the euro – but about how to scrap it, or at least allow the weakest members to leave.”

The most practical step would be to allow the strongest members to leave. The Netherlands could announce its intention to reintroduce the guilder without much fear of a run on Dutch banks. If anything, the announcement would most likely encourage capital inflows. Take away the strong members and the euro would weaken substantially, improving the competitive position of the remaining members. But I don’t expect anything so sensible to be tried.


The members of the Euro Rump would include Ireland, Italy, Spain, Portugal, Greece, Malta, . . .
Hardly an Optimum Currency Area.

Fair enough, we would be going from one sub-optimal situation to another sub-optimal situation. It’s a bit like leaving a sinking ship for a smaller vessel which may not be too seaworthy either. But staying put is not an option. Bear in mind that the strongest member still in the EZ (probably France) could also leave at that stage without suffering a run. Continue the process until only Greece is left. Then rename the Euro the Drachma and the dismantling is complete.

@Desmond Brennan
“Bunreacht gives v strong property rights”
We already departed from sterling and joined the euro without a whimper so there is already established precedent. Nayhow Kevins simple solution above is probably most likely – i.e we are left in a devaluing Euro zone. Maybe then we would be happier severing that connection ourselves.

@Desmond Brennan

“Bunreacht gives v strong property rights”

Yes of course. What a pity the ‘Gang of Eight’ failed to notice when the property rights of the population were weighted down under water by the private debts thrust upon the population.

Was there a hurried letter to the Irish Times that I missed?

Read this article earlier today. Isn’t this guy a Eurosceptic?

Long before much of what he talks about comes to pass, Iran will have the bomb and the EZ will have a different type of banjaxed to worry about when people are driving them into the centre of Frankfurt/London/Madrid in the back of a truck shouting ‘Allah Hu Akbar’ and pulling the plunger.

@ Desmond Brennan

That is not quite the point that I was making. If the euro is a political project, which I think it is, it is political considerations, not economic, that will decide its future.

On balance, I think that these will ensure its survival.

The Irish Punt pre-existed Bunreacht, and was always merely pegged to Sterling, we removed the peg in the ’70’s. No appropriation of property there. To effectively move from the Euro, to a Punt Nua, would require appropriation of old debt/deposits.

Meh….govt has right to tax and debt…so no issue

Your suggestion makes more sense…would be tremendously difficult and would require full co-operation between the ‘rumpees’ and ‘exitees’…but seems more feasible. But full co-operation seems equivalent to solving the general problem…and I suspect more optimal general solutions might be preferred.

I think a more viable autarkic/unilateral solution would be for us to repudiate the ELA, and seek shelter under Sterling,with a gradual move to Sterling as official currency (I’m sure Dave and George would allow us print notes with harps rather than Queenie)


Not so sure about it surviving with this attitude…..

“Weidmann welcomed the German government’s opposition to using the central bank’s gold and currency reserves to bolster Europe’s 440 billion euro rescue fund, the European Financial Stability Facility.

“I am glad that also the German government echoed our resistance to the use of German currency or gold reserves in funding financial assistance to other” euro-area members, he said. “Proposals to involve the Eurosystem in leveraging the EFSF — be it through a refinancing of the EFSF by the central bank or most recently via the use of currency reserves as collateral for a special purpose vehicle buying government bonds — would be a clear violation of this prohibition” on monetary financing.”

And yet the euro bounced on news that Silvio is to go…now at 1.3850 to us dollar.

@Desmond Brennan
I think that property rights is something of a red herring. It would only affect property by a (predictable) devaluation of the punt nua post the event so I guess your Euro deposits would already have been replaced with punts of equal value at the time. Whatever – you have no hope going down that road, so if you have worries there get out your briefcase and join the queues which should be forming before the the last post on this thread. There has been an unspoken rule on IE for the last couple of years – now breached – whatever else don’t start a run on deposits by careless talk about exiting the Euro!


I agree with you on this one; it appears to be raining little irelanders at the mo – probably just a shower.

@PR Guy

Get a grip! Persians don’t invade – they just don’t like being invaded. Shia Islam is a highly developed world creed. And you call yourself a PR Guy … tut tut … moderator pls delete.

“If anything, the behaviour of the markets supports my point.

Weidmann is also just plain wrong.”

Do not follow your drift on markets…the markets are behaving as if the EFSF is dead in the water. Look at yield and cover.

As for Weidman being wrong….brave assertion. The German constitutional court may think otherwise and I am sure Herr Weidman has the best of legal advice available to him.

Rachman’s FT has been lost for ages on EU Project. His boss is writing this evening on break-up of EZ. Eurosceptic Limeys will never understand what nonsense they’re wasting on EZ.

Rome Treaty (1958) was a political project to bring about peaceful co-existence between recent arch state warriors and whatnots….

Current EZ will integrate and intensify their monetary & fiscal union and also eventually convert their current executive into a United Europe! Even Stark and Weidmann are now singing the song of an integrated economic union.

The Greek and Italians, like the Irish, have tasted the value of Euro. So have the people of Iberian Peninsula. None of them will forego their EZ membership because they know the (geopolitical) benefits…more and more…as this crisis facilitates emergence of an integrated economic and fiscal union…and, already 2012 (US) forecasts are divining Euro as the singular success story!

@ ceterisparibus et al

I would be the first to agree that the present circumstances are not ideal and it seems especially regrettable that it was necessary to form a posse in the form of the Frankfurt Group.

The euro will only survive if governments confront their responsibilities and all have been failing to do so. The very minimum requirement is that the political parties in each country stop playing domestic politics with their participation in a monetary union. All EZ countries – apart from Luxembourg – are over-borrowed and the markets are dictating that they establish a national position and that they stick to it with regard to dealing with that participation. Papandreou and Berlusconi, and the Greek and Italian political establishments respectively, were (are?) singularly failing to do so. They have been called to order out of a sense of self-preservation on the part of the others and nothing else.

I do not accept that the central bank of any one country, or its constitutional court, should dictate political developments in Europe.
Neither will the electorates of the democracies that make up the EU.

Once the fire has been put out, which hopefully it will, there will have to be a return to a proper institutional context. Indeed, what is being overlooked is that many of the actions being taken by the Commission are based on the already revised legislation in relation to financial supervision and the strengthened Stability and Growth Pact.

Sometimes it seems like a deadly game of bluff. Make the German taxpayer pay or the markets blow up the Euro.
80% of people in the markets would go under if the Euro goes. The rest have bought gold and are planning the bombing of Iran.
But….the Euro could die by accident rather than by design. One more unknown unknown is all it takes. That could come from anywhere

Ireland could leave the Eurozone, but wouldn’t be able to forcibly redenominate debts/deposits into punts.


Ireland is a sovereign state(despite the Taoiseach and Tainiste’s protestations to the contrary). It essentially can do whatever it likes, and if the law says otherwise, it can simply be changed.

Well, I see France is heading down the austerity death spiral now too, so unless a radical shift away from this is taken soon, the euro cannot survive. And if Jens Wiederman’s nonsense is taken as the last word on ECB participation, then its demise will be all the swifter & more certain.

Any other financing options (without ECB unlimited backing) are akin to someone trying to lift a bucket by the handle whilst standing in it.

+1 to previous comments regarding getting some Punt Nua ready for distribution.

For the euro to survive…

Democracy & joint sovereignty must be asserted over the ECB. Austerity must be reversed & debt relief applied with its currency issuance ability. This will alleviate the current crisis & restore employment & growth. In such deep recession conditions, programs of debt-free spending can be delivered with little or no inflation risk. Even with a poorly designed approach, China, in effect, has achieved success & avoided the global turmoil with massive counter cyclical spending & minimal excess inflation.

What remains then are the key questions of (inherent) productivity imbalances and fiscal responsibility across the eurozone.

First, it is a complete nonsense to believe that industrial productivity can ever be fully ‘converged’. And any continuation of the ‘punitive’ methods to do so will revert us right back to where we are. The analogy would be something like attempting to get, say, County Kerry to become as productive as Dublin. Rediculous, & quite stupid to try. Just as regional imbalances are accepted in UK, US, etc., they must be accepted in a properly functioning EMU.

Second, fiscal responsibility, proper collection of taxes etc., budget harmonisation, assured & monitored by a central authority, must be accompanied by a quid pro quo of prosperity for all citizens & a guarantee of (near) full employment. MMT & ‘functional finance’ provide the appropriate framework.

If the eurozone will not adopt such a system, then Ireland should do so on its own. For commentary from an MMT perspective (& someone who actually understands macroeconomics), see Prof Bill Mitchell’s blog:

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