# What can we expect to happen if the euro collapses?



## Calico

Given the problems in Greece (and Ireland, Spain and Portugal) along with the fact that major players in the hedge fund market are now betting against the euro, if it does indeed collapse, how will it happen? 

Will a transition back to the punt create roaring inflation? 

And other than holding dollars, gold and works of art, what are the best ways to protect against the effects? What will it mean for our euro debts?


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## Brendan Burgess

David McWilliams was very clear that Ireland should leave the euro. Everyone dismissed this as nonsense, but just in case it happens...

Euro deposits in AIB will presumbably be converted into devalued punts. 

I presume that it is the same for deposits in Northern Rock and Rabobank.

Would I be better off transferring my money now into a German bank? 

I have a UK investment which I am in the process of unwinding. Should I keep it in a bank account in the UK in sterling? 

How would Irish shares be affected? Most of the large plcs - CRH, DCC,Ryanair have few assets in Ireland.


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## Brendan Burgess

And what about our mortgages? 

If I have €50k on deposit and €100k of a mortgage. 

If I move the €50k into German euros, then am I on a win/win situation.

If there is no devaluation, I am not affected. 

if there is a devaluation, then my German euros will be worth more than 50% of my mortgage?


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## mustang01

Is this a realistic threat? Am looking at the xe.com site and don't see any major movements in the euro v stg. Where is all of this panic coming from?


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## jhegarty

Brendan said:


> And what about our mortgages?
> 
> If I have €50k on deposit and €100k of a mortgage.
> 
> If I move the €50k into German euros, then am I on a win/win situation.
> 
> If there is no devaluation, I am not affected.
> 
> if there is a devaluation, then my German euros will be worth more than 50% of my mortgage?



What's a German euro ?


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## Calico

jhegarty - it sounds fanciful, but remember the euro is one great experiment. There are no precedents when it comes to it. Over the past c.10 years there was nothing to harm the euro but the next 10 look decidedly precarious. 

The fact that some very big hedge funds are now betting against it, along with commentators alot more learned than me predicting it's collapse, should be enough cause to at least pique our interest. 

Presumably, from Brendan's post, worst case scenario, the euro still survives in the likes of France & Germany so money deposited there is safer? Or is it a case of one or two members leaving bringing the whole monetary union down? Even if not, the value of the euro would likely fall through the floor if some members left.

As for Northern Rock, deposits are guaranteed by HM Treasury so I would have thought they are not converted back into punts? Simlar with Rabodirect?


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## Towger

jhegarty said:


> What's a German euro ?


 
Whats an Irish Euro..? There were stories that in some countries they checked the codes on the notes and would not taken foreign notes.

Can you even tell easily where a note is issued from the serial number?


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## Brendan Burgess

There is no panic.

But just a bit of long-term planning. 

If Ireland exits the euro, I imagine that the deposits in Irish banks will be converted back into punts. 

So a "German euro" is a deposit in a German bank. 

Brendan


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## NorfBank

Brendan said:


> And what about our mortgages?



If we exit to Euro, is it bye bye to the tracker?

Presumably leaving the Euro will be classed an an extraordinary event allowing banks to get out of tracker rate mortgages. The ECB rate will no longer be the reference point for the tracker mortgage if the mortgages are denominated in punts.

If the mortgages remain denominated in Euro but  our currency becomes the punt, we then have fx risk in our mortgages as alluded to by Brendan.


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## Towger

NorfBank said:


> If we exit to Euro, is it bye bye to the tracker?


 
Is it? Was it Argentina where people had dollar tracking mortgages, but then the local currency devalued/hyper inflated they were still stuck paying their dollar mortgages with a greatly devalued local currency.

I remember an interview on the radio (Dunphy?) pre euro with the man (half Irish?) who was originally in charge of implementing the euro project in Europe, but left/fired as he came to the conclusion the project would fail. He had written book on the subject and was going the interview rounds to sell it. Does any know his or the books name?


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## z107

Well there is certainly no harm in spreading the risk. I'm very nervous about leaving deposits in Irish banks.

Would Euros as cash be deemed safe? or a mixture of US Dollars, Sterling and Euros? or maybe good old fashioned gold?


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## Sherman

Towger said:


> I remember an interview on the radio (Dunphy?) pre euro with the man (half Irish?) who was originally in charge of implementing the euro project in Europe, but left/fired as he came to the conclusion the project would fail. He had written book on the subject and was going the interview rounds to sell it. Does any know his or the books name?


 
Presumably you're thinking of Bernard Connolly who wrote the Rotten Heart of Europe about ERM etc?


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## LouisCribben

Brendan said:


> David McWilliams was very clear that Ireland should leave the euro. Everyone dismissed this as nonsense, but just in case it happens...
> 
> Euro deposits in AIB will presumbably be converted into devalued punts.


 

I'm trying to understand this

In what way would the Euros be converted into "devalued" punts ?

What would be devalued?

Surely at 00:00 (midnight) on day one of the new currency (call it the new punt), one euro would equal exactly one new punt.

Then over time the markets would decide if the new punt would rise against the euro, or fall against the euro.

If we were lucky, the new punt could rise against the euro, it wouldn't necessarily devalue, we wouldn't necessarily be all worse off.

It's a little bit similar (althought not the same) as 1979, when the Irish pound was tied to sterling. Then the link was broken, and the markets decided over time if the pound would rise or fall against the punt..


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## Bronte

Calico said:


> The fact that some very big hedge funds are now betting against it, along with commentators alot more learned than me predicting it's collapse, should be enough cause to at least pique our interest.


 
Is that's what happening to weaken the Euro, that hedge funds are betting against it, they want Greece to collapse? Who are these hedge funds?


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## mustang01

But where/how is it weakening? I'm not seeing any major changes from the last week or so - actually it was at .86 against sterling two weeks ago and is now .88?


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## Ethan 1

Very interesting article here

http://www.telegraph.co.uk/finance/...il-out-as-EU-creates-economic-government.html

Can paragraph 6 be a misprint

German exposure to the region amounts to €43bn in Greece, €47bn in Portugal, *€193bn in Ireland*, and €240bn in Spain, according to the Bank for International Settlements. German lenders are already vulnerable, with the world's lowest risk-adjusted capital ratios bar Japan.


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## roker

Would you like our government handling our punt? they can do what they like then.


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## Sherman

Ethan 1 said:


> Very interesting article here
> 
> http://www.telegraph.co.uk/finance/...il-out-as-EU-creates-economic-government.html
> 
> Can paragraph 6 be a misprint
> 
> German exposure to the region amounts to €43bn in Greece, €47bn in Portugal, *€193bn in Ireland*, and €240bn in Spain, according to the Bank for International Settlements. German lenders are already vulnerable, with the world's lowest risk-adjusted capital ratios bar Japan.


 
I reckon (although I have no basis for this) that they are taking into account the balance sheets of the German banks' IFSC offshoots in that figure.


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## sunrock

Well if somehow we left the euro and were given punts on a 1 to1 basis for our euros,it wouldn`t be long before our politicians ceded to every interest group demands and started printing punts . This would of course move our currency lower and some would argue like Mc williams that this is a good thing because imports would become expensive and irish produced goods would be cheaper,meaning a balance of payments surplus. However one could say the same about any poor country where imports are really expensive....the point is the majority of people ,myself included will be poorer and will have to pay more in the supermarkets.Its O.K. for the elite who will compensate by getting ever increasing salaries,but the majority will have lower spending power. SO I SAy ,I will do all in my power to keep the money printing press out of the hands of our government. At least with the euro, they have to have a bit of discipline. Another factor is the E.U.could retaliate by putting presure on our low corporation tax.


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## dontaskme

Sherman said:


> I reckon (although I have no basis for this) that they are taking into account the balance sheets of the German banks' IFSC offshoots in that figure.


 
Depfa bank in particular turned into a money pit - the German government had to put in place something like 100 billion in loan guarantees.



Naturally, the Germans weren't that pleased with the performance of the Irish regulator.

I think Irish people like the euro though and if there was any risk of changing people would still be using euros. Shops and tradesmen would probably still take euros after the change. If you look at Poland or the Czech republic, you can use euros there no problem. Montenegro even uses it as its currency although its not an official eurozone member. It would be one thing to bring in new punts, it would be another to get people to use them without it turning into a Zimbabwe situation.

The Germans are probably glad the currency is weakening a small bit - they have already lost their crown as world's biggest exporter to China and a strong euro against the dollar was affecting their exporters.


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## Calico

Another respected observer predicts the demise of the euro...
*
SocGen’s Edwards Sees Euro Breakup as Feldstein Predicts Change Feb. 12 (Bloomberg) -- *

The Greek budget crisis is a symptom of imbalances that will lead to the breakup of the euro region, according to Societe Generale SA strategist [broken link removed], and Harvard University Professor Martin Feldstein said monetary union “isn’t working” in its current form.

       Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, top-ranked Edwards wrote in a report today. Feldstein, speaking on Bloomberg Radio, said a one-size-fits-all monetary policy has fueled big deficits as countries’ fiscal records differ.     
        The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” Edwards wrote. 

Even if governments “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable breakup of the euro zone.” 

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahuQR4YFStHQ&pos=5


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## sunrock

How can you take seriously the views of BLOOMBERG and its biased guests. The station is always cheerleading the american economy and pouring doubt on China and the euro.This is to bolster the dollar even as the dollar printing presses are going into overdrive.Sterling has also fallen against the dollar yet that fact is ignored.


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## ringledman

sunrock said:


> How can you take seriously the views of BLOOMBERG and its biased guests. The station is always cheerleading the american economy and pouring doubt on China and the euro.This is to bolster the dollar even as the dollar printing presses are going into overdrive.Sterling has also fallen against the dollar yet that fact is ignored.


 
Bloomberg, CNN, CNBC, Fox they are all generally rubbish and still sell the American dream and sprout short term buy signals. They rarely offer any real long term investment advice. 

Nonetheless, they do occassionally bring on some 'real' guests in the form of Albert Edwards, Peter Schiff, Marc Faber & Jim Rogers. 

Guys who know what they are talking about when it comes to long term macro moves. It is just important to differentiate between the chaff and the very few real economists in the world today.

In terms of the euro; it is a flawed concept and will collapse eventually. 

How can you ever expect to merge the economies and currency of 16 countries with different languages, cultures, economic stages of development and social practicies? You simply can't. 

The dollar is flawed also long term, but at least it speaks with the voice of one country and one government. The euro experiment has never been tried before in history.

I see a slow decline and eventual breakup for the euro, maybe over a decade or so. 

The efficient and wealthy Germans will want out at some point. Their taxpayers will not want to prop up every other country that they have no real historical ties to.

http://www.moneyweek.com/blog/why-germany-should-dump-the-euro-00122.aspx

Eventually Europe will return to its original and proper aim of being a free market for the movement of goods, capital, services and people. 

The failed socialist economics of even greater integration will disappear and allow Europe to compete once more on the global stage. 

Unfortunately it will take a decade or so of further federalist and large state failure before we see any positive economic change.


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## ringledman

dontaskme said:


> It would be one thing to bring in new punts, it would be another to get people to use them without it turning into a Zimbabwe situation.


 
You only get a Zimbabwe situation where you have a State run economy that has no idea about real economics.

If the economy is sound and supported by a large private sector and small public sector then a Zimbabwe situation shouldn't occur.

If you allow the currency to float freely, have no cost controls in place, and have 'real' producing private sectors of the economy, that sell products to the world with a large trade surplus then you will have a strong currency. 

Also an economy that- 

- Allows inward and outward free movement of international capital without any restrictions. 
- Has low corporation and personal taxes.
- A large private healthcare and education system reducing the burden on the state.
- Is 85%-90% private sector. A minimal state sector is required to create real wealth. 

It is bad government policies (socialism and statism) that leads to a currency collapse, not the fact that a country has a small economy and currency relative to the rest of the world. 

Look at the economic success of Singapore over the past 40 years. An excellent model for any small country to copy. 

4.5 Million population and an unbelievably amount of wealth held in their Soverign Wealth funds and foreign currency reserves. 

Probably the richest nation on earth (per person), yet one of the smallest.


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## dontaskme

ringledman said:


> You only get a Zimbabwe situation where you have a State run economy that has no idea about real economics.
> 
> If the economy is sound and supported by a large private sector and small public sector then a Zimbabwe situation shouldn't occur.
> 
> If you allow the currency to float freely, have no cost controls in place, and have 'real' producing private sectors of the economy, that sell products to the world with a large trade surplus then you will have a strong currency.
> 
> Also an economy that-
> 
> - Allows inward and outward free movement of international capital without any restrictions.
> - Has low corporation and personal taxes.
> - A large private healthcare and education system reducing the burden on the state.
> - Is 85%-90% private sector. A minimal state sector is required to create real wealth.
> 
> It is bad government policies (socialism and statism) that leads to a currency collapse, not the fact that a country has a small economy and currency relative to the rest of the world.
> 
> Look at the economic success of Singapore over the past 40 years. An excellent model for any small country to copy.
> 
> 4.5 Million population and an unbelievably amount of wealth held in their Soverign Wealth funds and foreign currency reserves.
> 
> Probably the richest nation on earth (per person), yet one of the smallest.


 

 As I see it, if the Irish government tried to replace the euro with new punts or whatever, people would see this straight away as a bad policy and would want no part of it. People would start hoarding dollars, euros, sterling, swiss francs. 

Public servants would get paid in new punts but would probably try to convert into euros or sterling as soon as possible. If no-one wants the new currency everyone is a seller and no-one is a buyer then the new currency will tend towards valueless. 

Assume that hedge funds will jump on the bandwagon and sell it down and it could easily lead to hyperinflation. Hyperinflation would have the advantage that people's debts would be wiped out, but so would their deposits, so the banks would be even more worthless, if that's possible.

According to the Sindo, this was one of George Lee's secret policies but it would need a government with a higher popularity rating than 13% to carry it out.


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## sunrock

It is true we could be more competitive if we ditched the euro and changed to the punt, as the new currency would be heavily sold and thus fall in value. The net result would be de facto wage/welfare reduced purchasing power for everyone as prices would rise alarmingly and everyone would change their punts to other currencies asap.This is an incredibly risky and reckless policy and if George Lee was in favor of it,we`re well rid of him.If we want to get our cost base down we can continue with the safe and steady cuts that the government will carry out and still have the stability of the euro.We are lucky that there is a lot of fat to cut and the people will just have to get on with it.


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## csirl

As this question ranks alongside other questions such as:

"What would happen if aliens invaded the earth?" and "What would happen to my mortgage repayments if a nuclear war obliterated civilisation?". 

does it really have a place on a serious discussion board such as askaboutmoney?

It's very easy for the likes of McWilliams and George Lee to say that the country would be better off if we took their advice and pulled out of the Euro because they know it will never happen so they will never be proven wrong. 

Turn back the clock a couple of thousand years and the equivalent question would be 

"Should we stop using gold coins and go back to bartering?".

You cant stop progress.


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## sunrock

Csirl ,you make a very  valid point . However it is a good exercise to dicuss it thoroughly because in these recessionary times, some credible people like Mcwilliams and allegedly Lee trot out this panacaea.Why?   I am not really sure...probably because they crave popularity with the general public. And we all know that politicians would do or promise anything to win votes.Granted once in power they usually renege on their promises,but then again we might get a few headstrong ones who won`t realise the implications until it is too late.


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## ringledman

csirl said:


> As this question ranks alongside other questions such as:
> 
> "What would happen if aliens invaded the earth?" and "What would happen to my mortgage repayments if a nuclear war obliterated civilisation?".
> 
> does it really have a place on a serious discussion board such as askaboutmoney?
> 
> It's very easy for the likes of McWilliams and George Lee to say that the country would be better off if we took their advice and pulled out of the Euro because they know it will never happen so they will never be proven wrong.
> 
> Turn back the clock a couple of thousand years and the equivalent question would be
> 
> "Should we stop using gold coins and go back to bartering?".
> 
> You cant stop progress.


 
So progress is a union of 16 different economies at different stages of development all with different interest rate and monetary requirements but all having one central bank and one interest rate???

It is not a question of Ireland pulling out, but rather having in place a plan to deal with the situation when the euro eventually breaks up or Germany leaves - http://www.moneyweek.com/blog/why-germany-should-dump-the-euro-00122.aspx

Clearly Ireland couldn't leave now but the possibility of the euro currency collapsing is a real one. 

Who 24 months ago would ever have believed that major global banks would collapse or fannie and freddie may would become the largest bailouts in the history of the world?

The euro demise will take time. Within 10 years it could well be gone or some of its members having decided to leave.

Progress has resulted in countless currency and country collapses over the centuries. 

The euro has many fundamental flaws.


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## Calico

ringledman said:


> The euro has many fundamental flaws.


 
+ 1 (I might also include the word 'fatal' in there)


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## z107

> "What would happen if aliens invaded the earth?" and "What would happen to my mortgage repayments if a nuclear war obliterated civilisation?".
> 
> does it really have a place on a serious discussion board such as askaboutmoney?


Please could you clarify? Do you think it's a foregone conclusion that the Euro will break up?
At the moment, it does seem frighteningly likely, but it hasn't happened yet!

I was thinking a possible solution to save the Euro would be tax harmonisation coupled with universal public sector benchmarking across the EU.


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## Sunny

Of course it has flaws. None of what is happening now wasn't forseen back when the EURO started. This is a very good paper on the impact of leaving the EURO. It won't break up but if it does, it would probably be the least of our worries

http://www.econ.berkeley.edu/~eichengr/breakup_euro_area.pdf


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## csirl

The Euro wont break up. The Euro is a currency - it is NOT an economy. The strengths and weaknesses of particular economies or the indebtness of particular banks are totally different to the concept of a large group of people agreeing to use a common currency in order to make transactions between them easier. If we get to the stage where people no longer trust paper money, then deficits will be the least of our worries. So, if you think the Euro is going to collapse, you obviously believe that that our civilisation and society is going to collapse.


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## csirl

umop3p!sdn said:


> Please could you clarify? Do you think it's a foregone conclusion that the Euro will break up?
> At the moment, it does seem frighteningly likely, but it hasn't happened yet!
> 
> I was thinking a possible solution to save the Euro would be tax harmonisation coupled with universal public sector benchmarking across the EU.


 
I believe that the Euro is as likely to collapse as those two events, which are improbable.


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## Shawady

csirl said:


> The Euro wont break up.


 
What about a country leaving? Having control over its own interest rates and being able to devalue a currency might outweigh any benefit of being a euro member.
This might appeal to smaller countries.


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## dontaskme

Shawady said:


> What about a country leaving? Having control over its own interest rates and being able to devalue a currency might outweigh any benefit of being a euro member.
> This might appeal to smaller countries.


 
But once the hedge funds get a sniff of fear they will be all over the new currency like a pack of wolverines. The only way to avoid hyperinflation would be to let interest rates go through the roof. 

The euro is at least some way stable because of the size of the eurozone. People talk about volatility when it moves 2 or 3% over a week but if you wanted to see real volatility just imagine what would happen if the drachma or the lira were reintroduced.


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## newirishman

One might remember that until 2003 the Euro was always under parity with the USD; the band was 0.85 to 0.95 
The initial setup of the Euro was to be on par (or thereabouts) with the USD. 
Insofar (and only insofar) the Euro has "failed" (if you really looking for a failure) as this target has not been achieved since Feb 2003 (or thereabouts). So if people talk about a devaluation of the Euro please keep this in mind.


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