Breaking up is easy – and is commonplace. Currencies can leave a union

        I have found there are are least 87 examples of countries leaving currency unions and establishing their own money  since 1945. In most cases establishing an independent currency allowed the country concerned to set more sensible interest  rates and exchange rate to help them grow. In every case it gave them more independence, strengthening their ability to make their own decisions free of foreign interference.

       The Euro remains under pressure.  Many in the markets and in the weaker countries are waiting for Mrs Merkel to relent. They just want her to say the ECB can buy up many more EU country bonds, and print the money to do so. She so far resolutely  refuses to do this. The Governor of the Bank of England this week in his press conference explained her reasons very well. He pointed out that a Central Bank has a role as the lender of last resort. That means it acts as  the lender who supplies cash to commercial banks in its jurisdiction if they are solvent but in need of temporary loans. They are lent money at a penalty rate to see them through. It is not the job of a Central Bank to act as lender of last resort to countries that have run out of credit and whose solvency is in doubt.
          Saving the Euro is ultimately a political decision for the leading countries in it. Saving it means finding a way of relieving pressure on the bond markets for the weaker countries. That in turn means the richer countries being prepared to send money to the poorer parts as transfer payments and grants. Alternatively the richer countries need to agree to use their more favourable credit rating to borrow and lend the money on to the weaker countries at subsidised rates. This in reality means the richer countries paying some of the bill for the poorer countries. German public opinion does not favour doing this, hence Mrs Merkel’s reluctance. Maybe one day she will, but so far there is no sign of it. She still thinks it can all be done by cutting spending and raising taxes, but so far this has not worked.
          The alternative to big transfers of money and subsidies around the union is the break up of the Euro area. The leading participants have allowed their own speculation about letting Greece out of the zone slip into the public press. There is still a feeling by many inside the governments, and by many of their faithful followers in the press, that the break up would be a financial disaster. It would perhaps be wise of them to read a little more of the history of the break up of previous currency unions. There have been plenty of examples.
          Within Western Europe the latin currency union led by France and the Scandinavian currency union both broke up without great calamity at the time of the First World War. Between  1945 and 2007 according to the Monetary Authority of Singapore  69 countries have left currency unions. This figure leaves out a good number, including the  break up of the rouble currency in the early 1990s. It also excludes the split of Czech and Slovak currencies in 1993. It includes the ones which  left the sterling area, like  New Zealand in 1967 and Ireland in 1979. It happened by agreement with a relatively smooth transition. Some like Bangladesh left the Indian union. Others left former colonial unions: Mozambique for example left the Portuguese area in 1977 and Algeria left the French franc area in 1969.  Again these changes caused so little disruption that most have forgotten they ever happened.
            It was with more sense of turmoil and crisis that the rouble area broke up in the period 1992-5. 16 members of the rouble union broke away forming their own new currencies. This includes Russia that established a new differently valued  rouble for herself.  Latvia, for example, did it in two stages. First she created a Latvian rouble, which started at a one to one exchange with the old common rouble. Then she launched a new currency, the lat, to replace the Latvian rouble. It worked and allowed her economy to develop well for the ensuing few years.
            The uncertainty about the end game for the Euro continues to damage markets. The battering of the bonds does make things far worse. It means banks will lose yet more money on what were meant to be safe holdings. This in turn means they will lend less, slowing growth still further. If the bond markets force more countries into default like Greece it makes recovery more difficult. Attempting to prevent his by offering large loan bail out packages for the bigger countries at risk is going to strain political and financial tolerances within the union. Mrs Merkel holds the fate of the Euro in her hands. Either she has to sanction large amounts of financial support to the poorer areas, or she has to organise an orderly restructuring of the membership of the zone. The good news is that if she with France  did finally decide to change the membership, history shows it can be done and it need not be too disruptive. It is surprisingly common for countries to leave common currencies.



  1. barnacle bill
    November 20, 2011

    John it is leaving the EU, not the Euro, that we should be discussing now.

    1. GJ Wyatt
      November 20, 2011

      One step at a time, blistering barnacles! First we must give the lie to those who say that Euro exit means leaving the EU. Then, as above, show that the sky doesn’t fall in when a country exits from the currency. In fact far from it. For the supposed miscreants it is the best thing they could do. It just leaves egg on the faces of the Euro dreamers and schemers – all this expensive kerfuffle is about avoiding that. As for us in the UK, who can really say whether a break-up of the currency union is worse than the alternative currently supported, rather impertinently, by Cameron and Osborne.

  2. lifelogic
    November 20, 2011

    You have been very busy with you history books do you ever get any sleep? As you correctly say:-

    Either she (Mrs Merkel) has to sanction large amounts of financial support to the poorer areas, or she has to organise an orderly restructuring of the membership of the zone.

    Why can she not see this? I see she even studied physics from 1973 to 1978 at the University of Leipzig usually a good sign. Surely any good GCSC/O level physicist can see this after just a hour or two of thinking – what is the matter with her have the bureaucrats brain washed her in some sinister way?

    1. lifelogic
      November 20, 2011

      Listening to “Any Answers” on radio 4 yesterday a sensible businessman rang up to point out that businessmen have huge burdens put on them by silly regulations which stop them employing people.

      Jonathan Dimbleby (“BBC think” to the core) then decided that the word “businessmen” was not acceptable to the BBC and started to censor and interrupt him just to point out that there are business women too – lest some, presumably very dim listeners, had forgotten.

      When he complained Dimbleby went on “I am not being politically correct I am merely pointing out there a lot of women as well. He went on “it is a pertinent fact to remind people who may have forgotten – that woman and men run small businesses.

      Can it be long before the BBC insists that we always say:- “Business Woman, disabled, Muslim, Asian, African, Chinese and cross gender business people and anyone else” before we are allowed to make any point.

      Needless to say they cut his mike off midstream twice to censor him and, I assume, did an investigation to see how a sensible businessmen had been allowed on air.

      I assume Lord Patten approves?

      1. davidb
        November 20, 2011

        To be fair, the caller decided to argue the point, although I did think Jonathan D was a bit abrupt, he is the chairman and should be deferred to.

        1. lifelogic
          November 20, 2011

          But why on earth did Dimbleby feel the need to butt in cut of his microphone (and “correct” as he saw it) just because he said the evil word “businessmen” and then to deny that he was being politically correct when he clearly was being?

          Just BBC “equality wash” think over substance every time.

      2. matthu
        November 20, 2011

        In a special series across 2011 BBC Woman’s Hour is following the fortunes of three businesswomen …

      3. Robert Pay
        November 20, 2011

        Spot on…Dimbleby was unbelievably prissy – but then, of course, the caller was a businessman therefore had to be put in his place. (He sounded like Farage…) Why don’t the Beeb replace Dimbleby with Harman? I also noted that the Point of View slot after Any Questions is the usual balm of the rent a lefty crowd. Mary Beard, Will Self, etc. I like the programme but it seems to be there to reinforve the urban left BBC bias…add to that Taylor pere et fils who seem to be on the radio everyday…

        1. lifelogic
          November 20, 2011

          She would have to change her name to Harperson I assume.

        2. MartinW
          November 20, 2011

          I believe there has been only one right-of-centre speaker in the entire series of “A Point of View”, Radio 4 – and that was Clive James. Of his talks was devoted to lambasting the scam of AGW (aka climate change), and thus he has been little seen on BBC since. I hope my memory servies me right here.

          1. lifelogic
            November 20, 2011

            I have never though of Clive James as being right of centre – but it is good to hear he has sussed the global warming exaggerations. I suspect more due to his Australian connections where like the USA China and most countries almost no one believes a word of it.

        3. rose
          November 20, 2011

          I think both Dimblebies (makes allegations about the views they might hold with no evidence to sustain it-ed), and petrified of being outed, and then sacked from their hugely lucrative positions – which are unelected, hereditary, and for life – by their backroom girls. Remember the painful transition David was forced by them to make from “the lady in red” or “the gentleman in blue” to “the woman… ” and “the man…”? He still looks uncomfy when he does it. Surprising he isn’t made to call them all “guys” now.

          1. APL
            November 21, 2011

            JR: “(makes allegations about the views they might hold with no evidence to sustain it-ed),”

            Except what we see and hear every time they hold forth on the BBC propaganda channel.

          2. rose
            November 21, 2011

            To be fair to Mr R, I was slightly varying our usual point, so he is probably right to keep it to himself.

      4. John Maynard
        November 21, 2011

        I happened to listen to “Songs of Praise” this morning, where some nutty vicar was explaining that the story of the tower of Bable, somehow justifies the St Pauls campers !!

        The BBC is one long Goon show these days.

        1. rose
          November 21, 2011

          He should be reminded of the Cleansing of the Temple.

      5. Wilson
        November 22, 2011

        By interrupting the businessman and mounting his hobbyhorse on this matter, Jonathan Dimbleby was not only rude to him but too full of his own self-importance. This little aside wasted time and meant that there was little time left to hear the businessman explain how complicated it is to employ people these days. The question in Any Questions had concerned unemployed young people.

    2. lifelogic
      November 20, 2011

      I am delighted to see that the Duke of Edinburgh describes the policy of covering Britain’s countryside with wind turbines as “an absolute disgrace” and the claim that wind can meet our imminent electricity deficit as “a fairy tale”.

      Perhaps he and explain it all to Huhne, his departmental experts and perhaps even Prince Charles – maybe on while next driving together in his Aston Martin to his helicopter or private jet.

      1. APL
        November 20, 2011

        ” .. Duke of Edinburgh ”

        A real National asset. Pity he didn’t spend more time with his eldest son!

      2. Peter Stroud
        November 20, 2011

        HRH The Duke of Edinburgh is dead right about wind generation. Most sensible people including many scientists agree. Add to this the latest view from the IPCC: that manmade interference with climate is unlikely to be noticeable over the next few decades. Then why on earth are we being forced to tolerate wind generation? Why on earth are we worried about coal fired power stations? Why are we worried about our, so called, carbon footprints?

        Many scientists, and I am a retired scientist, have been completely dissatisfied with the science behind CAGW for some years. But the politicians, including most senior Tories believe in the orthodoxy and are not prepared to even question the IPCC.

        Good for Prince Phillip.

        1. APL
          November 22, 2011

          Peter Stroud: “But the politicians, including most senior Tories believe in the orthodoxy ”

          Most senior Tories are international socialists, the ‘Carbon tax’, would be a convenient funding base for a world government.

          For instance, just look at Cameron’s latest pronouncements on housing costs. He is going to subsidize mortgages and ‘encourage the banks to lend’. The pretense being that this is to help the youth afford their own house.

          It is as clear as day that lower house prices would help people not on the housing market afford a house, but Cameron by instinct is an interventionist.

          Encouraging the banks to do a thing is interventionist and the sort of thing Socialists do without thinking of the consequences – exactly what Cameron is doing. Not thinking.

      3. Derek Weston
        November 21, 2011

        I have yet to see a microeconomic analysis of the economic benefits of Wind Farms.There is much waffle spoken by those in favour.Many politicians are windy (no pun intended) about appearing to be in opposition to wind farms and being accused of anti-green sentiments.Let us see a proper and detailed non-political microeconomic analysis, showing eg., the capital cost, the wholelife costs, the replacement costs and the maintenance costs of a ‘Wind Generator’ versus the whole life generation in KW in optimal and sub-optimal wind conditions.Bye the way ”No subsidies payed for by the Gas,Coal and Oil users”

    3. Disaffected
      November 20, 2011

      She used to work under Khol and I suspect her views mirror his ideology.

      Once more, John’s view is correct about an economic solution to the problem. This does not address the fanatical political ideology of creating a pan European state. The break up of the Euro or Europe would mean an end to that dream. Many Europhiles would view it as disastrous because it would put the dream back many years or even forever. Public and political opinion would be eroded. Billions have already been spent to avoid this, not because it makes economic sense but to fulfil a political dream.

      If Clegg, Huhne or Alexander had their way the UK would be in the single currency and broke. The UK would now be faced with the terms of an ultimatum to be taken over by the EU. They continue to use language of fear and to deride anyone who has a different opinion.

      Gallant intellectuals like Mr Redwood would be blocked from cabinet even if Cameron wanted him to be there- which he does not.

      Wind farms do make any economic sense, but Huhne Clegg and Alexander will pursue an unintelligible European target irrespective of the cost or the detriment it has to the UK economy by failing to produce cheap energy for business and homes. This is about a nonsensical European dream. Both Huhne and Clegg being a part of it in former roles and now back to promote the same in their country.

      1. Disaffected
        November 20, 2011

        Typo: Wind farms do NOT make

        1. lifelogic
          November 21, 2011

          Wind farms do not make any economic nor do they make and environmental sense.

          How much would you pay for your electricity if the supplier could supply it only at random times and dates.

      2. Derek Weston
        November 21, 2011

        You may wish to edit your contribution to put in a ‘not’ or have I misread your input.

    4. figurewizard
      November 21, 2011

      One reason why Germany cannot bail out the Euro is the fact that their own sovereign debt had reached 93% of GDP by the end of last year. It probably won’t be any better at the end of this one.

    5. Stephen Birch
      November 22, 2011

      She should, surely, be addressed as Frau doctor Merkel or some such not Mrs Merkel

  3. Antisthenes
    November 20, 2011

    Either the EZ is wound up, best or it becomes a tighter fiscal union, disastrous. If by treaty everyone in the euro-zone agrees to a fiscal union if it is not to fail it will be necessary in parallel to agree a political union. That implies an elected president and an executive for the euro-zone and the downgrading of national legislatures to mere governorships. It would also mean that those EU members not in the euro-zone would have to leave, join or take on the mantle of territories. As that is not going to happen as euro-zone states may be prepared to give up fiscal sovereignty they certainly would not give up their political rights so it would be back to kicking the can down the road until the next crisis. Eventually the same problem would arise except this time to keep the EZ intact political union would have to be imposed. Time to leave I think. Otherwise the UK remains part of an unworkable Heath Robinson structure teetering on the verge of collapse then later delegated to the status of a territory being governed by the EZ but without representation.

    1. Denis Cooper
      November 20, 2011

      If any countries had to leave the EU then it would more likely be the countries that wanted to form a fiscal union.

      Either the detailed agreement between a group of EU member states to form a fiscal union would be compatible with the EU treaties, or it would not.

      If their agreement was compatible with the EU treaties then no countries would need to leave the EU, if it was incompatible with the EU treaties then they could not make that agreement while remaining members of the EU.

      It’s a cardinal principle of the EU that its treaties always take precedence over any other treaties or international agreements made by a member state, with some explicitly stated exceptions such as the NATO treaty.

      Therefore if a group of EU member states wished to enter into a fiscal union treaty which was incompatible with the EU treaties they would have to leave the EU.

      That would mean that they were cut off from the EU institutions, including the ECB.

  4. Mike Stallard
    November 20, 2011

    I have been thinking hard about all this over the past few days.
    First of all, I have reluctantly come to the conclusion that we must leave European Union immediately because it is ruining our industry, our small businesses and also (who knows?) maybe a couple of our biggest banks. Charles Moore’s excellent precis in the Telegraph yesterday brought all this on.

    Secondly, the demos of the world for us English must be the people who think and speak and believe what we do – the Commonwealth. What if the Pakistanis and Bangla Deshis are Muslim and we aren’t? Take a look at Leicester or Peterborough. Everyone knows that the days when Britain was a universal, Christian country with just Churches and no Mosques went forty years ago. We are producing a class of black people, too, who are moving out into Africa to start up their small businesses there.

    We need to get with the mission of the times and the Commonwealth is the place to do it. They are crying out (especially Africa) for some inclusion into our trade patterns and this (thank you CAP) is just not going to happen while we are in the EU. All they want from us is inclusion in our trade patterns and also our high ideals of freedom of the individual. They do not want to tell us how to count, to measure, to employ, to “compliance”….

    The EU is yesterday’s project. A hundred years ago, Europe really was the centre of the world centred upon the capital cities at the hub of World Empires. Wake up! Now, in 2011, Europe is as much a backwater as Sweden. And it seems to be drifting the way of North Korea.

    1. Alan Wheatley
      November 20, 2011

      Agreed, the future is the Commonwealth. All can benefit.

      1. John Maynard
        November 21, 2011

        Why do people keep cracking on about the Commonwealth ?
        If you mean India, say India. The Commonwealth doesn’t exist anymore.
        It is rather touching that certain gentle souls out there, really think Brits will trade in their Mercs and BMWs and buy good old Aussie Holdens !

  5. Peter van Leeuwen
    November 20, 2011

    A scenario to make e.g. Greece leave the euro may not be that easy. Their current government doesn’t want to leave the euro, and if pressured, might yet call a referendum to support its case. Another consideration has to be whether a Greek exit may diminish contagion or will only increase it further.
    Mr Cameron asks for less Europe. Most other countries, and most importantly Germany, ask for more Europe. So more Europe it will be.

    1. Denis Cooper
      November 20, 2011

      There be no problem engineering another regime change in Greece.

      1. Peter van Leeuwen
        November 20, 2011

        How’r you going to that Denis? I thought that you valued treaties?

        1. Denis Cooper
          November 20, 2011

          I didn’t say that I’d be doing it, an absurd notion.

          If Merkel finally decided that the survival of the main body of the eurozone depended on the amputation of a diseased limb such as Greece, then if the regime refused to co-operate she would get it changed.

          1. Peter van Leeuwen
            November 20, 2011

            A typical eurosceptic view. She didn’t get the last egime changed and she won’t get the next regime changed. Internal politics in Greece took care of that. EU and IMF are quite right in withholding funds if the Greeks don’t keep their side of a deal and of course that may cause some internal trouble among politicians in Greece. But there is no outside changing of a Greek regime, whatever conspiracy stories the eurosceptic press invents for its gullible audience.

    2. Mike Stallard
      November 20, 2011

      “Contagion” is a strange word to use here.

      Germans, like every other people, just want their nation to do well and for themselves to be in employment making money.

      This means that, because they are so excellent at what they do, they will come to dominate the continent of Europe as it becomes more and more inward looking. Greece, I am afraid, will be doomed to poverty and rural subsistence with maybe a couple of German owned sweat shops. They know this.

      Meanwhile, Ireland has had to have its budget checked by Germans and a few French. Back to the days of the British empire! Let us hope without 1916 and the Post Office.

      Meanwhile, poor Mr Rajoy fights for independence of broke old Spain with all its useless houses ruining the landscape in the best bits. Never mind, they can still make good wine for German tables.

      Meanwhile the Italians riot in the streets as they face a return to pre unification and to being an agricultural backwater.

      Looks pretty promising to me.

    3. John Maynard
      November 21, 2011

      Peter, the “Europe” that the southern tier (and Scotland) wants is German and Dutch money. The “Europe” that Germany wants is fiscal discipline and hard work,
      And there is no room in the market for Greece, Italy, Spain and Portugal to suddenly develop world competitive manufacturing industries, so what will they do ? Italy’s once thriving machine tool industry and Spain’s once nascent auto industry, have already been gutted by competition, and it will only get worse as India and China develop.
      These countries can never be “new Germanies”, even if they wanted to, and had the capacity to be.

  6. Edward
    November 20, 2011

    Spot on John, usually a country leaving a currency union leads to positive effects.

    You left out one major ‘leaving’ and that was sterling leaving the ERM. Ok, not really a currency union, but similar in style and definitely leaving had a positive effect.

    In terms of the Euro, the more I consider this matter the more I believe Germany leaving the Euro provides a partial and more palatable immediate solution.

    However Germany would be loathe to take such an action as it would be seen as the taking unilateral aggressive actions (something they have built an allergy to) and anyway their exports would become relatively more expensive.

    1. Chrissy
      November 20, 2011

      How about also considering countries which have abandoned pegging their currencies to another currency? E.g. when we had a fixed exchange rate with the US? Also, abandoning the Gold Standard. Should we be looking at the effect of these actions?

  7. APL
    November 20, 2011
    1. Antisthenes
      November 20, 2011

      Enjoyed watching that it reinforced everything that Mr Redwood and his followers like us believe is the problem and his pointing out that there was only one unstoppable solution that of major defaults was quite sobering. It was typical bias BBC with the interviewer aggressively trying to blame the problem solely at the door of speculators.

      1. David Price
        November 20, 2011

        Agree, it was a very interesting exposition from Mr Bass until the interviewer started trying to take things in sensationsalist directions.

        Interesting that he thinks the next links to break are Japan and France .. I wonder if his comments about France were edited out.

    2. lifelogic
      November 20, 2011

      Yes indeed but it would have been even better without the constant interruptions and daft questions from the BBC interviewer.

      1. APL
        November 21, 2011

        lifelogic: ” it would have been even better without the constant interruptions”

        Nah! there is a full scale economic catastrophe looming but its more important to know about the crazy American obsession with GUNS & GOLD.

  8. Rebecca Hanson
    November 20, 2011

    Breaking up is not easy to do. But it is often the right thing to do.

    1. Rebecca Hanson
      November 20, 2011

      Breaking up becomes easier to do it the parties which are breaking up agree that the separation is necessary.

      It also becomse easier to do if those involved and affected by the break up have at least an outline picture of the future they are aiming for so that they can plough their energies into making it a better future than it might otherwise be instead of into trying to save the status quo.

  9. Jim
    November 20, 2011

    If, say, Italy left the euro and reverted to the lira it would be amongst other things, I suppose, in order to then devalue and so make its exports more competitive …

    But once Italians suspect that their euros were about to be converted into lira and devalued, wouldn’t they quickly transfer their euros to a “safer” part of the eurozone, or change them into dollars, or buy gold … ? Wouldn’t there be a run on the banks?

    1. forthurst
      November 20, 2011

      The most serious situation might arise if Germany were to leave the EZ; it might take most Euro denominated deposits with it unless the EZ and Germany were to set possibly inappropriate interest rates for their respective economies.

      There is also the issue of Euro denominated bonds: in what currency would they be redeemed after exit?

      1. Denis Cooper
        November 20, 2011

        Germany is the keystone of the eurozone, like the keystone in an arch, and if it was removed then the entire structure would immediately collapse.

        There’s no way that France could provide either the deep pockets or the leadership to keep the rest together once Germany had left.

  10. Javelin
    November 20, 2011

    The research reports on Friday show that there is deflation of 12% in the UK. I assume that it is much much larger in the PIIGS. In Germany there is mild inflation and in fact runs a surplus. Hyper inflation is a very REAL threat in Germany. It is NOT German paranoia.

    If you try to save the PIIGS by printing money you will heavily risk destroying Germany. I have every sympathy with Ms Merkel.

    Two thirds of growth in the UK in the last 5 of Labour were public sector borrowing and spending. This is true for many PIIGS. So fiscal cuts will cut growth further.

    I can well believe that Mr Cameron and Osborne do not understand the markets position in the EU.

    When we in the City say the EU is “f*cked” this is what we mean. Which ever decision you make pro or anti anything the EU is ruined.

    1. sjb
      November 20, 2011

      Doesn’t the City also say past performance is no guarantee of future results?

      “Rumor from the Bundesbank treasury traders is they are preparing for an overnight exit. “[1]

      “I’m going to stick my neck out here and say a week either side Nov 11th will be the final straw for the Euro.

      I’m expecting a fall of the order of 20-25% on the equity markets over a week in that period. “[2]


  11. Robert K
    November 20, 2011

    This is a fascinating analysis – thank you for bringing it to us.
    One small point is that the breakup would most logically start with the largest and strongest members of the union. If Germany was to restore the DM, its currency would appreciate strongly, reducing its export competitiveness within Europe and making its domestic market more attractive to export nations wishing to sell into it. The rest of the euro area would weaken proportionately, making its exports cheaper and more attractive. As the next strongest member state (France, probably) left, its currency would strengthen and the rest of the euro area would weaken again; and so on until the euro was wound up. This would be a much less traumatic process thank kicking out the weakest euro members. Nor would it mean the “end of Europe” as Mr Sarkozy would have us believe.

  12. oldtimer
    November 20, 2011

    In your last paragraph you say: ” If the bond markets force more countries into default…” referring to Greece and others.

    I suggest it is not necessarily the bond markets forcing anyone. Rather those who buy bonds, including insurance companies, may be voting with their feet and their wallets and deciding that there are better places to invest their clients` hard earned and hard saved cash.

    It suits the EUrocracy to blame the bond markets. In reality they should blame themselves.

  13. Single Acts
    November 20, 2011

    This is a very well reasoned analysis and a perfectly good alternate route that no front-bench politician nor anyone in the MSM will even contemplate.

    This is why mainstream politics is dead.

  14. Gary
    November 20, 2011

    Ah yes, when a country cannot live within its means, it is preferable to get out of a currency union so that the country can inflate and steal the savings and pensions of the citizens to give to the banks.

    It is better to make the malinvestments worse, to reward those who made the dodgy loans, than to default and clean the rot out.

    Every loan ever made was made in this system was made with money created put of thin air by the banks, whom you are proposing to save by inflation.

    Good thing this blog is here as testament, so we can see how these proposals turn out.

    Print this or censor it. History will judge.

  15. Martin
    November 20, 2011

    Looking at the PIIGS many of them have substantial gold reserves. Why don’t they say to their bond holders – we will guarantee 25% of the bonds with the gold in our reserves.

    Come to think of it the UK (little gold) could lend Italy (lots of gold) money. If Italy honours the bonds we are all happy. If the loan goes bad the UK gets the gold.

  16. Michael Read
    November 20, 2011

    Excellent analysis. But surely, Merkel is much deeper in the pooh than even you put her.

    It is just impossible for her, politically, to commit German taxpayers to underwriting the Euro delinquents.

    Google Kyle Bass, CEO of hedge fund Hayman Capital Partners. Hard to disagree with his analysis that, excluding Germany, the euro economies are locked in a death spiral in which bond interest payments are poised to outstrip ability to pay. So their inevitable fate is default and restructuring … which unfortunately leaves all our banks – apologies for making this point again, Mr Redwood – as fully-crystallised zombies too.

    Still, I admire Ms Merkel. I wish we had a version. A sweet smile for Italians and Greeks bearing debts but no problem turfing the boys out of bed if Teutonic national interests are compromised. Vorsprung dur technik.

  17. Alan Wheatley
    November 20, 2011

    The contrived amalgamation of the good with the bad in the hope that the good will pull up the bad can produce the opposite result: British Leyland, for example.

    Are there examples of currency unions where the outcome has been beneficial?

    Reply: They only work when they are part of unifying a new country – e.g dollar union for USA – and even then there was a civil war to cement it all

    1. forthurst
      November 20, 2011

      Why is there a need for a common currency for the EU? Countries could conduct their mutual trade in DM and use local currencies for local payments. Obviously, this is what the French wanted to avoid, but was it and is it not the only sustainable solution unless they become a country?

      The dollar was accepted as the international currency when it was convertible to gold, but there seems growing resistance to its use for international trade now, with some countries having to be invaded to prevent them making alternative arrangements.

    2. Davi Tomlinson
      November 20, 2011

      May I take issue with you?
      The American Civil War was in part prompted by a currency union which was unbalanced between the North and the South. The outcome ensured the perpetuation of this imbalance to the impoverishment of the South for 80 years until the Second World War.
      The huge investment of war expenditure in the South from 1942 (training bases because of the preferable climate, recruitment of the poor etc) provideded the massive transfer of funds from North to South necessary to correct this imbalance.
      To this day, US armed forces are substantially recruited from the South, where their main training bases remain.
      New European Army paid for by Germany and recruited and trained in southern Italy?

  18. Denis Cooper
    November 20, 2011

    On March 25th Cameron too readily assented to a radical EU treaty change, which may be read here in the EU’s Official Journal: 


    of 25 March 2011

    amending Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro


    If Cameron had been thinking along the right lines, he would have said to Merkel and Sarkozy:

    “I’ll agree to a treaty change to free you to do what you want to stabilise the euro, but on a number of conditions.

    One of those conditions is that you agree to another treaty change so a country can leave the euro, and do that in an orderly way with minimum disruption and cost.”

    That would have been a perfectly reasonable demand, because:

    a) It was already clear that some countries should never have been allowed to join the euro in the first place, and should now be eased out; and

    b) Even if a country fitted into the euro well enough when it first joined, over time conditions could change so that was no longer the case; and

    c) In some of the countries which are already in the euro, the people may not want to be subject to greater integration in order to stabilise the euro.

    That would have been one of at least NINE other treaty changes Cameron should have demanded as his quid pro quo for agreeing to any treaty change like that in European Council Decision 2011/199/EU, all of them related to monetary union – nothing to do with fisheries, or the Working Time Directive etc – and all of them perfectly reasonable demands.

  19. uanime5
    November 20, 2011

    John in every example you provided leaving a monetary union was part of the break up of a country or a colony becoming independent. So this means Greece should be fine if it leaves the euro and EU, and then creates a new currency.

    Are there any examples of countries introducing a different currency but remaining in a political union similar to the EU?

    Reply: Some who left the rouble related bloc joined the EU

  20. Damien
    November 20, 2011

    Major EZ lenders and investors have been on de facto notice that there is a strong possibility of a EZ exit by the PIIGS and have been steadily reducing their debt exposure. The UK banks have shown in their recent reports that they have also been reducing lending to the EZ. This however has not been the case for France and Germany who remain heavily over-exposed.

    Italy would have to return to the lira and its debt would have to be revalued in the lower value lira for it to be able to sustain its debt repayments. This would in effect be a default on its internal and external private and public debt. Good news for borrowers – bad news for lenders and investors.

    Germany and France have a choice. They can oversee the orderly breakup of the euro and take a major hit EZ as those exiting the euro default on their debt. This would mean the loss of some of its banks and another recession or they can allow the ECB to backstop the EZ. The former would be a one off event the latter would be a slow lingering transfer of wealth from the core to the periphery.

    For the countries that would exit the EZ it would mean that their exports would be possibly 70% cheaper than they are now and for hundreds of millions of europeans this would mean they would have improved employment prospects as they rebuild their manufacturing and export base.

    1. APL
      November 21, 2011

      Damien: “The UK banks have shown in their recent reports that they have also been reducing lending to the EZ.”

      Yet the Italian banks are still tapping CoL for liquidity: “The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country’s debt levels squeeze liquidity out of the Italian financial market.”

      for the rest of the article:-

  21. Barbara
    November 20, 2011

    This is what’s needed – analysis based on precedent, reason and evidence, rather than hysterical scare-mongering about the sky falling in if the euro re-configured or broke up.

  22. Tedgo
    November 20, 2011

    Any plan to introduce a new currency has to be openly published so that legislation and other measures can be put in place several months in advance. It should also aim to maintain existing private and business wealth to avoid runs on banks and capital flight.

    My plan, say for Greece, would be;

    1) Introduce the new Drachma initially with parity to the Euro. Government bonds and the like would be converted to Drachma immediately.

    Converting all bonds to Drachmas is to encourage the markets to consider their actions, if they force the Drachma down too much then they will take a bigger haircut.

    In the short term Government borrowing requirements would be met with freshly printed Drachmas.

    2) All existing private and business bank accounts etc, would remain Euro accounts. The only condition would be that these accounts would be able to take and give Drachmas at the current prevailing exchange rate, there would be no separate buy and sell rates and no commission.

    This is to avoid a run on the banks and does not destroy existing private and business wealth. A business with a million Euro’s in an account, in readiness to pay for materials and services recently supplied to them, still needs a million after D day.

    Banks needing support on this aspect would be supplied with freshly printed Drachmas.

    3) Banks would offer Drachma accounts, with the same provision as the Euro accounts on currency transactions.

    4) All government employees and state benefits would be paid out in Drachmas. This might seem unfair, but will encourage employees to move to the private sector.

    5) All financial legislation, such as income tax allowances etc, would be changed to Drachmas.

    6) All new government contracts would be in Drachmas. Old ones would remain in Euros though renegotiation would be encouraged.

    7) Both Drachma and Euros would be legal tender. Ultimately real Euro notes in circulation would dry up, if only through wear and tear.

    8) All existing private and business loans and contracts would remain in Euros. This would encourage interested parties to renegotiate. On future loans and contracts businesses would be left to choose for themselves as appropriate.

    9) Businesses would be free to pay employees in Euros or Drachmas.

    A simple plan. No doubt the brainy readers will pull it to bits.

  23. John Bowman
    November 20, 2011

    Perhaps it is precisely because leaving the euro would be relatively easy and result in improved economic fortunes is why the Euro-elite are against it.

    Where one leads others would follow and I suppose the biggest problem would be the German public, never true euro enthusiasts, who seeing the advantages might want to leave too. Then there would be no euro at all. France as the bedrock of a Germany-less euro. Hilarious.

    Ironically though, the break up of the eurozone might be the very thing to save the EU as the euro failure is bringing the whole project into question among the People.

    What is Merkel doing? Laissez-faire. Germany will be OK whatever happens and perhaps she is not such an enthusiast for the EU project as she makes out. She certainly must hear the echos of the Communist State in which she lived.

  24. Martyn
    November 20, 2011

    This is a direct quotation from the ‘simple version’ of the Lisbon Treaty to which the UK is bound. “After joining the European Union, countries remain members by choice. The Treaty of Lisbon includes a voluntary withdrawal clause, recognising that the member states may always withdraw from the Union if they wish to”.
    Clearly, if the UK so wished it could simply say we wish to withdraw from the EU. How hard can that be?
    Something else I have pulled from the EU simple version of the Lisbon Treaty says “There are already many ways in which European citizens can find out about and take part in the political process of the EU. The newest of these is the citizens’ initiative, whereby one million citizens, from any number of member countries, will be able to ask the Commission to present a proposal in any of the EU’s areas of responsibility”.
    I wonder if we could whip up one million in the UK to have to go at that? And what would we ask of the EU, if it came to that?

    Reply: Most things still require a majority vote in the UK Parliament

  25. English Pensioner
    November 20, 2011

    The simplest solution would be for Germany to leave the Euro as it seems to be the only financially prudent country amongst the lot. This would of course meet with the approval of the German people and would, I suppose, leave France at the helm. Its a pity about Holland though!

  26. Optingout
    November 20, 2011

    The problem comes back to the underlying one that John Redwood still continues to ignore, but there was a bit of progress the other day.

    The EU and the UK government have run up massive debts, hidden off the books. The progress was JR now admits to an additional 1,300 bn of debts, on top of the Gilts.

    However, he’s still not admitting to the state pension being a debt. People have paid for it up front, and that makes it a debt. Total up all such payments up front, and expected losses on the Guarantees, and its 7,000 bn, on tax revenues of 550 bn.

    Now I suspect most people will want something for their tax pound, rather than it going on debt. They want the NHS, police, roads, courts, schools, … The amount left over to service the debts isn’t enough. They will default.

    So what’s missing from the 7,000 bn? Not included is future spending that will be forced. Namely, how do you handle the 50% of the population without savings for their retirement when you have stopped paying the state pension. If we carry on as we are now, then the total effective debt is 20,000 bn, rising with inflation.

    35 times geared? More if you spend the money on ‘services’.

    Reply: I have always told readers of the pension liabilities, PFI, PPP, bank debts and gilts as you well know. Nor have I sought to hide the future costs of the basic pension.

  27. Bernard Otway
    November 20, 2011

    John it is a great pity that the likes of (named person-ed), now have to mention that his piece above is on the PUBLIC record [IF YOU DO NOT CENSOR IT],inside and underneath ALL the comments AND your writing are HOW all the stuff as I call it AFFECTS us ALL ,are peoples FEELINGS
    whether they be anger,frustration,incredulity or any other EMOTION you care to name.I read Littlejohn on friday in the Mail,and I am sure you would have censored most of what he wrote
    YET it is now firmly in the public domain and ON THE PUBLIC RECORD,more to the point printed and published by a major newspaper having gone through their legal dept,so is NOT
    ACTIONABLE in any way shape or form,as long as what we write is not libellous or defamatory why not let it be read VERBATIM,it REFLECTS genuinely held feelings and
    opinions,people like us are talking like this to others every day,and if all the rest are like this as I am then thousands of people are receiving this opinion daily and probably the comment that we feel and are censored.(Complains I deleted allegations about possible criminal misconduct by someone-ed),IT WILL BE PUBLISHED and my friend’s contribution will then BE A MATTER OF PUBLIC RECORD,thus negating your censorship.

    Reply: Fine, I understand how you feel. I just do not wish to have to spend time retracting things from this site because individuals or companies take exception to allegations that have not been proven here. Publish your allegations somewhere else if you wish. I offer a great deal of freedom on this site for you to make the points you want to make without naming individuals or using language which might be offensive to others.

  28. Alan Radford
    November 20, 2011

    The desire to save the Euro and the EU springs from the understandable personal interests of every member of the EU elite. Where else, on merit, could they get that kind of dough?

  29. Richard
    November 20, 2011

    I see that the noble Lord Heseltine claims today the UK will still eventually join the Euro.

    Quite staggering how someone appearing to be intelligent can still hold an opinion so far removed from all the available current facts staring in his face.

    He should really be apologising for supporting for decades, a pro Euro position which has now been seen to be unnecessarily impoverishing many millions of European citizens.

    Time for even the die hards to realise that the Euro is already a complete failure and move to a new post socialist European model of free trade, peaceable relationships and prosperity.

    1. Chrissy
      November 20, 2011

      Surely he should also apologise for toppling Mrs T?

      1. APL
        November 21, 2011

        Chrissy: “Surely he should also apologise for toppling Mrs T?”

        Nah! He should apologize for lumbering us with John Major.

        He should be defenestrated for toppling Mrs T!

  30. matthu
    November 20, 2011

    It seems that some self-appointed climate experts have formed themselves into a group calling themselves the Climate Parliament. Apparently LibDem MEP Sir Graham Watson is one of the members who wrote as follows:

    We also voted for the EU to seek at the forthcoming UN climate talks in Durban to continue the Kyoto Protocol after 2012 and to press for a wide ranging climate agreement by 2015, covering emissions from air and sea transport and including a commitment to cut total CO2 emissions by more than 20% by 2020. I will go to Durban as chairman of the global Climate Parliament and will report next month on how we get on.

    My question is, is it not an offence to pass yourself off as a public body in this manner?

    For example: The following restrictions apply under sections 53-55 and 1197-8 of the Companies Act 2006:
    •names that suggest a connection with Her Majesty’s Government, a devolved government or administration or a specified public authority;

    If this really is a new (presumably EU) public body, what do our members of the UK parliament have to say about it?

    1. matthu
      November 20, 2011

      Sorry – here is a link to the Climate Parliament

  31. matthu
    November 20, 2011

    The UK will sign up to a revision of the Lisbon treaty – aimed at underpinning tough new fiscal rules for the eurozone – in exchange for an undertaking from Berlin that it will allow for an examination of the impact of the directive, which imposes a 48-hour week on workers across the EU.

    The tentative deal, agreed over lunch in Berlin on Friday, may allow the prime minister to sell the idea of an EU treaty change to his Conservative backbenchers on the grounds that he will be repatriating social powers to Britain.

    Do we get a referendum this time?

    1. Denis Cooper
      November 21, 2011

      Almost certainly not.

      Firstly, an undertaking to examine the impact of the WTD would not be written into the treaty change.

      Last time Cameron got an undertaking that Article 122(2) TFEU would no longer be (ab)used to justify eurozone bail-outs, but that was not written into the treaty change.

      Secondly, most likely the treaty change wanted by Merkel would only apply to the eurozone states, under the terms of the “referendum lock” law, the European Union Act 2011, and as last time Hague would invoke Section 4(4)(b) to deny us a referendum.

      Here is the statement Hague laid before Parliament on October 13th; the text of the treaty change agreed by EU leaders on March 25th is appended to it:

      “Statement under Section 5 of the European Union Act 2011”

      “Statement made pursuant to section 5 of the European Union Act 2011 relating to the Decision of the European Council of 25 March 2011 (2011/199/EU).”

      “Section 4(4) (b) of the Act provides that where an Article 48(6) decision relates to the making of a provision that applies only to Member States other than the UK, it is deemed to fall outside section 4. The Treaty change provision contained in this Article 48(6) Decision does not apply to Member States whose currency is not the euro. It does not therefore apply to the UK, as the UK is not among the Member States whose currency is the euro.

      In my opinion the European Council Decision of 25 March 2011 amending Article 136 TFEU with regard to a stability mechanism for Member States whose currency is the euro adopted under Article 48(6) TEU does not fall within section 4 of the Act and no referendum is required in the UK.”

    2. APL
      November 21, 2011

      matthu: “The UK will sign up to a revision of the Lisbon treaty ..”

      Our host will be able to assert his considerable influence with the upper echelons of the Tory party [why do the lamentations of Jeremiah spring to mind] to get us the referendum that was promised should there be substantial changes to the Treaty of Lisbon.

      pin drops

      Perhaps it was one of those cast iron promises.

      Reply: The question is how one gets from 111 votes to the necessary 326 in the Commons to gain a referendum.

      1. APL
        November 21, 2011

        JR: “The question is how one gets from 111 votes to the necessary 326 in the Commons to gain a referendum.”

        The question I am more preoccupied with is, how is that policy of yours to change the Tory party from within going?

        When will we see some substantial results of you policy? That doesn’t mean you couldn’t be an independent Tory or Conservative.

        Because if there isn’t any results then there isn’t any reason for you to stay in the Party.

        PS. Please don’t wheel out useless Eustace!

        I see Hestletine is mouthing off again. Two speed, multi track, doesn’t want to get left behind on the EUro train to BANKRUPTCY, Heltletine.

        Yes, him.

        Reply: Mr Heseltine is not an MP. How are we getting on? Answer there are now 81 Conservative MPs who did vote for a referendum. There were from recollection zero UKIP MPs voting for one.

        1. APL
          November 21, 2011

          JR: ” Mr Heseltine is not an MP ”

          So what?? You know as well as anyone that he sits in the Lords with his cronies Peter Mandleson, Neil Kinnock the putrefying EU sediment contaminating everything they touch.

          It must be just like old times in Tony Blair’s ‘big tent’ when this Tory Grandee was all but a fully paid up member of the Labour Party.

          The credentials of a Tory Grandee seems to be these days, a willingness to betray your country and consort with your political opponents at the expense of your own party.

  32. Lindsay McDougall
    November 21, 2011

    I am at one with Germany on this. Why should they support fiscally incontinent southern European nations who couldn’t be bothered running their affairs properly?

  33. pete
    November 21, 2011

    There you have it then – perhaps Germany is right not wanting to prop something up that is going to fail anyway – as in a failing business, I’ve been there, know what it feels like – you need to know when the time is right to get out.

    If the markets trigger this currency break up, these countries cant be buying anything anyway – let it happen. Let the countries in question revent back and de value their currencies and do what ever they like without affecting the rest of the worlds economies.

    It might cause more short term pain but should provide a way forward.

    Throw yet more borrowed cash at them like we did against the banks a few years back and all your doing is buying yourself a bit more time before the inevitable.

  34. Richard1
    November 21, 2011

    I find it slightly alarming that our govt seems to be so keen on the idea of the ECB backstopping insolvent govts in the Eurozone. As the Governor of the BoE says as you report, central banks are meant to provide liquidity to commercial banks not govts. But of course in a world where govts backstop banks, it amounts to the same thing. Out govt needs to move away from that concept and make clear that, whilst the BoE might provide liquidity against collateral to banks, the taxpayer will not backstop them (& the same should happen in the Eurozone). Likewise it should acknowledge that QE, whereby the BoE does lend to the govt, is a policy which will only in the end generate inflation. I’m with Mrs Merkel on this.

  35. javelin
    November 21, 2011

    Nomura published legal advice over the weekends to clients to check their small print as to whether their bonds could be redenominated.

    “The Japanese bank’s report, released Friday, is thought to be the first major practical study of what a splintering of the 17-country currency would be like for investors, ”

  36. javelin
    November 21, 2011

    Those who clung on the Gold Standard the longest suffered the deepest recession.
    UK and Japan left 1930, US 1932, Germany and France stuck with it.

    The UK and Japan came out of recession in 1934 and 1931 respectively.
    The US and Germany not till 1935. France stayed in recession till 1937.

    Sticking with the Euro, like the Gold Standard, will keep the recession longer and umemployment will keep rising. If it does then there is a real danger German or other EU politicians will start down the nationalist road. The EU will have achieved the opposite goal that it tried to achieve or unemployment and the rise of nationalism again.

  37. Bernard Otway
    November 21, 2011

    ARE YOU ABOVE CRITICISM. If so words and phrases like Orwellian,Stalinesque,Maoist
    are really in play.It can’t only be me but soon you might be the subject of the wordsmanship
    of Oborne,Hitchens etc etc,What then your credibility.

    1. APL
      November 21, 2011

      Bernard Otway: “Now I got censored ..”

      Bernard, do try and remember that this is John Redwoods private web site. He is entitled to post or not post anything he chooses.

      Goodness knows, I disagree with him on many issues, but he is usually fair and even handed in what gets posted.

      Pretty much everyone can set up a web site in about six mouse clicks, so if you feel strongly set up your own.

      John does a pretty good job here. Do cut him some slack.

  38. theyenguy
    November 21, 2011

    You write, The good news is that if she with France did finally decide to change the membership, history shows it can be done and it need not be too disruptive. It is surprisingly common for countries to leave common currencies.

    I reply that in my linked article, Bible Prophecy Provides Insight To A Resolution To The European Sovereign Debt Crisis, I write that Roy Schwarcz writes that bible prophecy of Daniel 2 and Revelations 13 foretells that Germany and a powerful leader will rise to empower a European Super State in a type of Roman Empire. “The Roman Empire fell apart from within, no enemy destroyed it. Rome is living in the great nations of Europe today: Italy, France, Great Britain, Germany, and Spain are all part of the old Roman Empire. The laws of Rome live on, as well as the language. Latin today is the base of French, Spanish, and other languages. Her warlike spirit lives on also as Europe has been at war ever since the empire broke up into these kingdoms. What is happening in Europe today? There is a diminishing of the nations and a unifying of the people with a common currency, common markets and common government. The foundation is being laid for the man who is coming someday to put the Roman Empire back together again.”

    An inquiring mind, concludes with four questions. What is a leader, what does a leader carry, what agenda does the leader carry, and what is that leader’s reward? Urban dictionary provides a number of definitions for leader. I am not a libertarian, but do relate that many Libertarians hold forth Ron Paul as their leader. Do you know what Ron Paul carries, and what his agenda is? He is very much an anachronism in this age of diktat. I believe He and his followers are likely to feel marginalized very soon, as they pursue Freedom and Free Enterprise; these are simply mirages on the Neoauthoritarian Desert of the Real. Freedom and choice are epitaphs on tombstones of the bygone era of Neoliberalism.

    Angela Merkel, Nicolas Sarkozy and Herman van Rompuy are leaders of this age. They are those who are first to serve. They carry the beacon of more Europe and more reform. Their agenda is a European Federal Union, where sovereignty is ceded to Brussels, Berlin and Paris. Their reward is sovereignty and the seigniorage of diktat.

  39. gipbert
    December 5, 2011

    There is almost always a war/insurrection just before or after a currency breakup. The Latin Union / WWI example is in the post. The American Civil War is another.

  40. Cristofer Esteban
    January 14, 2012

    Fantastic blog post.Much thanks again.

Comments are closed.