Pesetas, liras, franks and drachmas: euro is living on borrowed time

Article published on Jan. 4, 2012
Article published on Jan. 4, 2012
Multiple defaults, a return to the lira, pesetas and francs, the break-up of the monetary union and Europe comes crashing down. Sounds like an endless chain of unreal events? Perhaps not: the end of the common currency is no longer a taboo for European press and economists

Spain: coffee will still be overpriced

‘Everyone is saying it: it’s the end of the euro!’ The editor of the Spanish version of cafebabel.com jumps on her seat. She has just read an article on El Pais, the most optimistic one that the European press has published about the continent’s economic future. The Madrid headline foresees four different scenarios that all agree on one thing: in six months time, the average citizen won’t be able to afford a coffee date. Here’s why.

Option 1:Spain goes back to the peseta with the same exchange rate as 2002. Recession is brutal but it’s compensated by high raises in exports and tourism thanks to the devaluation established by the bank of Spain. It’s the most optimist scenario, in agreement with the forecast of capital economics, an English research centre that advises the PIIGS countries to leave the eurozone. So what if the treaties don’t allow expulsion or forced exit from the monetary union? History shows that previous economic shocks have contributed to the collapse of other unions (the USSR and Yugoslavia for example).

Option 2: Return to the peseta devaluated by 40%. Unemployment goes up to 23%. GDP looes between 30 and 40%. Abandoning the euro results in catastrophe, as explained by UBS experts, Citigroup and Rabobank. The reason is simple: private investors and firms will empty their Spanish accounts before it’s too late and store their savings abroad.

Option 3: Spain leaves the eurozone. Like Argentina, it quickly resorts to a ‘corralito’ to allow banks to close and avoid accounts being emptied. Banknotes turn into ‘euro peseta’, a kind of devalued euro that gradually allows shifting to a new currency. According to the Japanese financial group nomura, the private internal debt and most of the public debt will be converted into the new currency.

Option 4: Everything continues at the same pace as European institutions and German chancellor Angela Merkel have gotten us used to. Aid will go to the countries in need. A good portion of Italy, Spain and Portugal’s public debt will be let off, as has already happened with Greece. A cup of coffee will still be 1, 50 euros (1.23 pounds) but budget cuts and austerity measures will be stronger. Best to order tea.

Italy: underestimated Cassandra has predicted all

Loretta Napoleoni is one of the best-known Italian economists. She had predicted everything, but not this quickly, and had to hurry to update the conclusions to her latest book Il Contagio ('The Contagion'): dissolution of the euro, multiple defaults and a difficult return to the lira for Italy. ‘This austerity policy will bring a decrease of public income and a subsequent raise of the percentile values of debt when confronted with GDP. Interests on debt will also remain high,’ she writes. ‘The EU should be the one to approve and guide the temporary exit of PIIGS countries from the eurozone and the devaluation of national currencies. Even better: a two-speed Europe should be created along with more realistic parameters and more efficient controls for their future re-entry.’

Germany: caution and news blackout

Many are predicting Germany’s voluntary exit from the eurozone. A study conducted by economist Dirk Meyer from the Helmut Schmidt university in Hamburg was published at the end of November in the Italian dailyLa Repubblica. Germany has lost between 250 to 340 billion euros. In the present situation the country is paying up to 80 billion a year to help Greece and fellow countries. Online German news has not mentioned this at all: headlines remain as cautious as chancellor Angela Merkel.

France: euro could have gone before Christmas

French president Nicolas Sarkozy is doing his best but he can’t seem to convince Merkel over eurobonds nor on the role of the European central bank (ECB) to be a last resort for member state loans. Even the French newspaper Le Monde points out how crucial these measures are for the survival of the euro. On 28 November, economist and historian Nicolas Baveres wrote about the ‘end of the match’, pointing his finger at the lack of power and leadership in European politicians. ‘In order to save Europe,’ he wrote, ‘Paris must give up on credit growth and Berlin must say goodbye to the illusion of anachronistic monetarism’.

In an interview with the free daily paper 20 Minutes the socialist economist Jacques Attali said: ‘There is a 50% chance that the euro will be gone by christmas 2011.’ In the end it went the other way, but he had a point. On 9 December the European press was waiting in Brussels for the crucial summit of heads of state. Attali noted that the recipe for a solution would be made up of three key ingredients: allowing the ECB to act like all world central banks and buying the national government bonds from indebted countries, creating a rigid European control system on budgets and modifying the treaties in view of a common fiscal policy and establish eurobonds. Otherwise the situation would be disastrous for all commercial exchanges between partners such as China and the US and European countries, in particular France and Germany.

Image: (cc)  In Time/ Imdb