WI: Eurozone splits in two

This might be a bit too current for post-1900, but I'm sticking it in here for now. At the height of the eurozone crisis, there were suggestions that it could split in to two currency unions, with Germany and a handful of other Northern European economies keeping the current 'hard' Euro, and the countries in the south leaving, either to form their own currency with a lower exchange rate, or to go back to their own currencies, with some alignment with the remaining Euro. This article probably sums up the argument better than I can:

https://www.telegraph.co.uk/finance...ad-the-northern-core-and-France-the-rest.html

So let's say the Eurozone crisis is a lot worse, it spreads to more countries, and there isn't enough money for bailouts to stem the tide. What would happen if this option was adopted instead? Would it do anything to solve the debt crisis, and would their be a possibility of either or both sides of the split coming out of this reasonably okay?
 
Germany and Northern Countries' economic reliability wouldn't be a guarantee for Southern ones' debts and economies. BCE would be split in a Northern one and a Southern one. EU and IMF could concede money but with harder conditions. Probably Greece will collapse and Italy, Cyprus and Spain quickly will follow. Portugal and Malta will be able to save themselves as they had a better situation and a littler economy. Ireland will be in Northern Part. But if someone thinks that not paying Mediterranean debts will be a great news for Northern countries and Germany he isn't right: Spanish-Italian-Greek fallout will cause an international recession and will hit hardly Northern countries (for example Italy-Germany trade relationship is one of the biggest in Europe, so many problems for German industries if Italy fails).
In conclusion a division of Eurozone will cause a collapse of weaker part but our interconnected world economy will allow a instability economic contagious to others nations.
 
The idea of a northern and southern Euro have the same flaws as the assumed flaws of the one-size-fits-all Euro, there are differences among the "northern" countries that will lead to instability according to the idea that large differences lead to instability, and differences among the "southern" countries which too will lead to instability. With the southern countries failing the northern ones too will be infected due to the financial entanglement, first at the weaker members then the stronger ones. This will be seen as the end of the EU project, i cant see it surviving a complete meltdown.

As usual, we either hang together or we'll hang separately.
 
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The idea of a northern and southern Euro have the same flaws as the assumed flaws of the one-size-fits-all Euro, there are differences among the "northern" countries that will lead to instability according to the idea that large differences lead to instability, and differences among the "southern" countries which too will lead to instability. With the southern countries failing the northern ones too will be infected due to the financial entanglement, first at the weaker members then the stronger ones. This will be seen as the end of the EU project, i cant see it surviving a complete meltdown.

As usual, we either hang together or we'll hang separately.

Would that stop some countries from jumping the ship with argument like 'I might die if I jump, but I WILL die if I stay.'?
 
Would that stop some countries from jumping the ship with argument like 'I might die if I jump, but I WILL die if I stay.'?
Surely you mean the other way around.

Simply splitting it in two is already a hit to the eurozone(s) credibility, with countries failing and contagion spreading more and more would be heading to the exit. Those that feel they can afford to stay would stay, like Germany and the Netherlands.
 
Germany and Northern Countries' economic reliability wouldn't be a guarantee for Southern ones' debts and economies. BCE would be split in a Northern one and a Southern one. EU and IMF could concede money but with harder conditions. Probably Greece will collapse and Italy, Cyprus and Spain quickly will follow. Portugal and Malta will be able to save themselves as they had a better situation and a littler economy. Ireland will be in Northern Part. But if someone thinks that not paying Mediterranean debts will be a great news for Northern countries and Germany he isn't right: Spanish-Italian-Greek fallout will cause an international recession and will hit hardly Northern countries (for example Italy-Germany trade relationship is one of the biggest in Europe, so many problems for German industries if Italy fails).
In conclusion a division of Eurozone will cause a collapse of weaker part but our interconnected world economy will allow a instability economic contagious to others nations.

Aren't most of the Med debts owed to German banks anyway meaning the Germans are taking a big hit either way?
 
Germany and Northern Countries' economic reliability wouldn't be a guarantee for Southern ones' debts and economies. BCE would be split in a Northern one and a Southern one. EU and IMF could concede money but with harder conditions. Probably Greece will collapse and Italy, Cyprus and Spain quickly will follow. Portugal and Malta will be able to save themselves as they had a better situation and a littler economy. Ireland will be in Northern Part. But if someone thinks that not paying Mediterranean debts will be a great news for Northern countries and Germany he isn't right: Spanish-Italian-Greek fallout will cause an international recession and will hit hardly Northern countries (for example Italy-Germany trade relationship is one of the biggest in Europe, so many problems for German industries if Italy fails).
In conclusion a division of Eurozone will cause a collapse of weaker part but our interconnected world economy will allow a instability economic contagious to others nations.

That is assuming that a weaker currency doesn't stimulate the Southern economies which is a hell of an assumption. Their exports would probably rise and their imports fall making it easier to pay their debts not harder.
 
A split in the eurozone faces vast legal obstacles. And as much as people might wish to dismiss these legal obstacles along the lines of politics trumps legal, the uncomfortable truth is that a split in the eurozone requires a treaty change since by treaty the euro (and not the northern euro and southern euro) is what is legal tender in the states that have joined it. Legal tender law means that attempts by the government to change private citizens deposits from euros into something else without the requisite legal basis amounts to theft. And that is certainly actionable in domestic courts (cue a lot of court cases, which the governments are almost guaranteed to lose), especially as even during the height of the eurocrisis there was never any popular support for abandoning the euro even in the countries hardest hit like Greece (in fact I think support for retaining the euro went up which is to be expected, people generally don't like the idea of switching out a stronger currency for a weaker one when it comes to their personal savings and income).

It could happen. But it would require quite a bit of work to make it happen.

Far more likely is that the southern countries end up issuing scrip or IOUs which is supposed to be denominated in euros but ends up trading in secondary markets (for example if the Italian govt issues an IOU of €10 to an employee but the employee wants to buy a large bag fruit which is normally €8 and the merchant says because it is scrip they will only take it at €10 because of the risk of not getting actual euros when the scrip are redeemed, if ever. So the scrip is not worth €1 = scrip€1, but €1 = scrip€1.25) at a worse rate (not unlike Zimbabwe's bond notes) because it's just promissory notes rather than actual euros, while still remaining in the eurozone.

At some point some loan sharks and other similar businesses will likely be exchanging scrip for actual euros at margins to make a profit and aim to redeem the scrip at face value when the crisis is over.
 
https://www.simontaylorsblog.com/wp...costs-OpenEurope-internaldevaluation-2012.png

There was one outlier in the run-up to the Euro crisis, and it wasn't actually Greece. It was Germany.

Rather than splitting the Euro in two, have Germany readopt the Deutsche Mark. Germany's currency appreciates relative to the Euro, so there is no issue with defaulting on Euro-denominated debt. Meanwhile, its appreciating currency corrects the balance of payments issues between it and Spain/Greece/Italy. For their part, the residual Eurozone experiences a depreciation, making Southern Europe more competitive, and allowing the monetary authorities to take a much looser view of interest rates. Since the Southern Euro is the Euro, no default takes place.

Note, this is purely economics. It does not address the legal obstacles to Germany abandoning the Euro.
 
Germany and Northern Countries' economic reliability wouldn't be a guarantee for Southern ones' debts and economies. BCE would be split in a Northern one and a Southern one. EU and IMF could concede money but with harder conditions. Probably Greece will collapse and Italy, Cyprus and Spain quickly will follow. Portugal and Malta will be able to save themselves as they had a better situation and a littler economy. Ireland will be in Northern Part. But if someone thinks that not paying Mediterranean debts will be a great news for Northern countries and Germany he isn't right: Spanish-Italian-Greek fallout will cause an international recession and will hit hardly Northern countries (for example Italy-Germany trade relationship is one of the biggest in Europe, so many problems for German industries if Italy fails).
In conclusion a division of Eurozone will cause a collapse of weaker part but our interconnected world economy will allow a instability economic contagious to others nations.

Doesn't work like that. This Northern "economic reliability" is really trapping Southern Europe within a relationship that renders it completely uncompetitive. Basically, this is a balance of payments problem that the Euro (a political project, not an economic one) turned into a debt crisis - for the Euro to work, you really would need Germany to either have a solid round of wage inflation, or else have a system of perpetual wealth transfers from North to South (which is how the US manages). In short, fiscal union.
 
https://www.simontaylorsblog.com/wp...costs-OpenEurope-internaldevaluation-2012.png

There was one outlier in the run-up to the Euro crisis, and it wasn't actually Greece. It was Germany.

Rather than splitting the Euro in two, have Germany readopt the Deutsche Mark. Germany's currency appreciates relative to the Euro, so there is no issue with defaulting on Euro-denominated debt. Meanwhile, its appreciating currency corrects the balance of payments issues between it and Spain/Greece/Italy. For their part, the residual Eurozone experiences a depreciation, making Southern Europe more competitive, and allowing the monetary authorities to take a much looser view of interest rates. Since the Southern Euro is the Euro, no default takes place.

Note, this is purely economics. It does not address the legal obstacles to Germany abandoning the Euro.

That would probably be the more economically viable thing to do, though besides the legal obstacles (which as you noted aren't meant to be addressed in this post) there is the problem that a euro which is undervalued in relation to a theoretical D-Mark actually worked in Germany's favour, and as the euro remained relatively strong even during the euro crisis (it didn't collapse to $1 = €5 for instance) we are unlikely to see massive support swinging behind this. Marginal majority support sure (like maybe 52% to 48%), but it would be a weak margin of public support.

It likely would have made things better for the southern countries though.
 
There's also one further practical side-effect to Germany switching back to the Deutsche Mark. Since the banks with loans to the rest of the Eurozone would be getting paid back in depreciated Euros, this leaves the German banks in an uglier situation. It's very likely that the German Government would have to bail out its banking sector. Meanwhile, German competitiveness will take a hit from the currency appreciation, which isn't great for an export-driven economy like Germany's).

(In short, this scenario would require the German Government to basically commit political suicide in order to help the rest of Europe).
 
There's also one further practical side-effect to Germany switching back to the Deutsche Mark. Since the banks with loans to the rest of the Eurozone would be getting paid back in depreciated Euros, this leaves the German banks in an uglier situation. It's very likely that the German Government would have to bail out its banking sector. Meanwhile, German competitiveness will take a hit from the currency appreciation, which isn't great for an export-driven economy like Germany's).

(In short, this scenario would require the German Government to basically commit political suicide in order to help the rest of Europe).
As a resource poor country it would be a boon to it though. I'd expect it to more or less balance itself out, the cost of the imported oil and iron used to make German machinery goes down 20 %, the cost of the machinery for the customer outside of Germany would go up 20 % but they hand the saving from the resources to the customer in form of a lower price. Of course this doesnt work for export of services.
 
First of all, The Telegraph has become a promoter of Anti Euro propaganda. The Idea of the Eurozone actually works for Germany and the industrial, exporting counties. The poor southern counties help to keep the value of Euro low, good for exports. The poor counties would benefit from an even weaker currency, to boost the tourists' trade, but remain in the Eurozone, because it is better than bankruptcy.
 
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First of all, The Telegraph has become a promoter of Anti Euro propaganda. The Idea of the Eurozone actually works for Germany and the industrial, exporting counties. The poor southern counties help to keep the value of Euro low, good for exports. The poor counties would benefit from an even weaker currency, to boost the tourists' trade, but remain in the Eurozone, because it is better than bankruptcy.

The Eurozone is *causing* the bankruptcy. It's a twenty-first century gold standard, with all that entails.

(As for Germany... someone's current account surplus is someone else's current account deficit).
 
The Eurozone is *causing* the bankruptcy.
That is not true. Greece actually submitted inaccurate accounts when joining the EU. The county was bankrupt already. The different political parties spent far more than the county could afford. in order to buy votes.
The EU rescued Greece from disaster but insisted on changes that were unpopular and caused widespread demonstrations. Like the UK the, right-wing blamed the EU for the problems, but it was the failure of the Greek government. The same is happening in Italy and possibly Spain. However, the EU is 27 countrys and collectively benefits from being in it. It is the tax-avoiding billionaires like the Barclay brothers, the owners of the Daly Telegraph, that will like you to think differently
 
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That is not true. Greece actually submitted inaccurate accounts when joining the EU. The county was bankrupt already. The different political parties spent far more than the county could afford. in order to buy votes.
The EU rescued Greece from disaster but insisted on changes that were unpopular and caused widespread demonstrations. Like the UK the, right-wing blamed the EU for the problems, but it was the failure of the Greek government. The same is happening in Italy and possibly Spain. However, the EU is 27 countrys and collectively benefits from being in it. It is the tax-avoiding billionaires like the Barclay brothers, the owners of the Daly Telegraph, that will like you to think differently

Debt to GDP levels:

ercchart4313.gif


On the eve of the crisis, Greece had highish debt, but it was hardly bankrupt, and tame compared with Japan:

8s0VI.png


Note also that Ireland and Spain had lower debt levels than Germany on the eve of the crisis.

By contrast, lets look at the unit cost of labour:

591px-Unit_labor_costs_relative_to_Germany.svg.png


Now, that's far more relevant.

Basically, Southern Europe experienced inflation via Euro capital flows (which they couldn't actually do anything about, because of Freedom of Capital). Then the capital flows dried up. Which requires one of two things to happen - either an external devaluation, where the currency drops, restoring competitiveness, or an internal devaluation, where the rich pound the living shit out of poor people until wages drop. The Euro makes external devaluation impossible, and Germany refused to inflate its economy to let Southern Europe regain competitiveness (though to be fair Germany has got better since the crisis). Meanwhile, since the EU isn't a fiscal union, there is no systematic transfer of wealth back to Southern Europe after the manner of the USA. Which left the EU clobbering Southern Europe for a crisis that they themselves caused (it's easy to bash Greece. Spain is much harder).

Of course, as any economist will tell you, internal devaluation is not only extremely hard to pull off - wages are sticky in a downwards direction - but it also destroys the productive capacity of the economy. Killing GDP makes the debt/GDP ratio worse. The internal devaluation that was achieved (see above graph) was only achieved at incredible social cost.

In short, the Eurozone as implemented is an idiotic project. That isn't the Daily Telegraph speaking (why would I parrot them? I'm not British and not right-wing). It's uncomplicated macroeconomics.
 
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Debt to GDP levels:



On the eve of the crisis, Greece had highish debt, but it was hardly bankrupt, and tame compared with Japan:

Note also that Ireland and Spain had lower debt levels than Germany on the eve of the crisis.

By contrast, lets look at the unit cost of labour:



Now, that's far more relevant.

Basically, Southern Europe experienced inflation via Euro capital flows (which they couldn't actually do anything about, because of Freedom of Capital). Then the capital flows dried up. Which requires one of two things to happen - either an external devaluation, where the currency drops, restoring competitiveness, or an internal devaluation, where the rich pound the living shit out of poor people until wages drop. The Euro makes external devaluation impossible, and Germany refused to inflate its economy to let Southern Europe regain competitiveness (though to be fair Germany has got better since the crisis). Meanwhile, since the EU isn't a fiscal union, there is no systematic transfer of wealth back to Southern Europe after the manner of the USA. Which left the EU clobbering Southern Europe for a crisis that they themselves caused (it's easy to bash Greece. Spain is much harder).

Of course, as any economist will tell you, internal devaluation is not only extremely hard to pull off - wages are sticky in a downwards direction - but it also destroys the productive capacity of the economy. Killing GDP makes the debt/GDP ratio worse. The internal devaluation that was achieved (see above graph) was only achieved at incredible social cost.

In short, the Eurozone as implemented is an idiotic project. That isn't the Daily Telegraph speaking (why would I parrot them? I'm not British and not right-wing). It's uncomplicated macroeconomics.

Interesting debate and definitely agreed on southern europe experiencing inflation via euro capital flows which then dried up, but there are a few points I would want to make (which don't necessarily detract from any conclusions):

1. Japan is often used in a comparative way when it comes to debt, but Japan's economy is quite different from that of Greece. Greece's main foreign currency earners have been tourism and shipping for decades, and since the 1970s at least Greece has almost always been a net importer unlike Japan. So Japan's high debts are less of a worry for markets because Japan has the visible means to service them.

2. As I once noted elsewhere, unlike Japan and Germany, Greece's economic history has not been stellar to say the least. This is not the first time Greece's debt had to undergo international supervision (the first time was in the 1890s)

3. For countries like Greece, which have never been major exporters, external and internal devaluations will be more similar in effect domestically (with poor people feeling the brunt of it while rich people barely notice) than for countries which are. Greece's currency, the Drachma was never a major traded currency and as Greece was a net importer for decades, there was rarely ever going to be a net demand for Greek currency. And Greek imports would have had to have been paid for in US dollars, Pounds Sterling, Deutschemarks or Yen. An external devaluation for Japan can work in ways it probably couldn't for Greece, since it lowers the cost of Japanese exports in dollar terms (even if the price remained the same in Yen), while still allowing Japan to have a trade surplus

Recognizing this though is all the more reason why Germany and the others should have agreed to a fiscal union to accompany the monetary union. But Greece's troubles are quite likely to have happened with or without the euro.
 
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