Secular Café: Can the euro survive?

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Can the euro survive? May 14th 2012, 10:44 As I posted here, central bankers are now contemplating Greece's exit from the eurozone. But what would be the effect on the rest of the eurozone and could it survive? A good explanation and analysis here from Robert Peston. http://www.bbc.co.uk/news/business-18058270 Quote: Perhaps most importantly, any business of any nationality will find it extremely difficult to leave its money in euros in a bank in a country perceived to be at risk of following Greece out the door. That risk was already highlighted earlier this year in public statements of Vodafone, GlaxoSmithKline, WPP and Reckitt Benckiser that they were moving their surplus cash out of euros and out of the eurozone on a daily basis. To be clear, it's not just British and non-eurozone companies that are under an obligation to their owners to avoid (as far as they can) the devaluation and credit risk of letting their cash sit in Ireland, Portugal, Spain or Italy, the economies buckling under the burden of the most troublesomely large debts. The same duty would fall on big international Italian companies in Italy, or Spanish ones in Spain, and so on. Because the thing about global financial capitalism is that it is very hard for mobile multinational businesses to put patriotism before the preservation of wealth... ...These trends, of banks in the vulnerable economies finding it increasingly hard to hang on to deposits and increasingly hard to borrow, have been conspicuous for months. And they have had two important consequences for the European Central Bank and for the central banks of the stronger economies, especially Germany's, the Bundesbank. The first, which you will know about, has been the massive emergency bailout of banks by the European Central Bank, with the trillion euros of cheap three-year loans it has provided to them in the so-called LTRO. The ECB has been providing the credit to banks that financial institutions and big companies were increasingly reluctant to provide... ...The most likely outcome is that the banking system of the eurozone would become significantly more nationalised, kept alive on the drip of exceptional central bank credit. This is neither healthy or sustainable. But quite apart from the explicit lending to banks, the ECB and central banks of the stronger economies, especially the Bundesbank, also have a huge "counterparty" risk to Greece, Italy and Spain from the way that the payments system in the eurozone works. Under this system, called Target2, one consequence of businesses and households taking their money out of the bank accounts of the deficit countries, such as Greece, Italy and Spain, is that the German central bank ends up lending vast sums to the central banks of those deficit countries. Here is a slightly simplified account of how this works: when someone takes 100 euros from a Greek bank and transfers it to the perceived safety of a German bank (which has been happening quite a lot), that Greek bank gets the 100 euros from the Greek central bank, which in turn borrows the money from the Bundesbank. Here is the thing. As of March of this year, the German central bank had 644bn euros of claims on other central banks, equivalent to a quarter of German GDP. These are euros owed to the Bundesbank by the central banks of the economies where there has been the greatest capital flight, names those of Greece, Italy and Spain. So if all of a sudden, Greece and Italy and Spain decided to revert to their national currencies, it is an interesting question how much (if any) of the 644bn euros the Bundesbank could get back... ...However there is a more pressing and more important point. Let's say Greece withdraws from the euro and is unable or unwilling to settle the 100bn eurozone or so it owes the other eurozone central banks under the Target2 payments system. And on top of that there would be a huge write-off of the separate 50bn euros of Greek government bonds held by the ECB and eurozone national central banks. At that point it would become obvious to the citizens of Germany that they have been lending rather more to the eurozone's weaker economies than the eurozone's leaders have been telling them. Here is the interesting question. What would be the impact on German public opinion of finding out that German taxpayers had lost tens of billions of euros on loans to Greece that they did not know they had made? So Germany, as the strongest eurozone economy, would take some huge hits. It's hard to see any good outcome.

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