The horror that awaits us if the euro dies

IF European leaders cannot find agreement in the discord, the euro will not have a future.

If it falls, an investor flight could see the currency disintegrate quickly. Such a scenario would be as frightening as it would be unprecedented. And, while economies would recover, there would be an incredible amount of anguish and expense to endure. Nobody knows exactly what would happen if the euro died, but there are some questions that would get answered quickly. If the euro ended this weekend, what could we expect?

We could expect borders to be closed and tight restrictions placed on the movement of funds to stop people smuggling their euros to other countries likely to fare better in the revaluing exercise.

Interest rates would shoot up, to protect creditors.

Banks would be temporarily shut to facilitate the probable rebranding of euro in Ireland. There would have to be some way of making Irish euro look different from ones elsewhere, until new notes could be printed.

People would have to prepare for incredible inflation and an attempt to put a value on the economy, in order to peg a new currency in a hostile international environment.

* Should I move my deposits out of euros?

Firstly, if you have your money in cash deposits it is a risk regardless. This is as long as there remains the prospect of a break-up to one of the world’s strongest notes.

Irrespective of where that cash is, a post-Euro environment would be exceptionally volatile and nobody could predict which bets would win and which would lose.

There has been a drift of deposits from Irish banks in recent weeks and any prudent corporate entity has to be thinking of contingency plans.

The Swiss government has effectively started propping up the euro just to stop people running to its currency for sanctuary and making the Franc uncompetitive.

* But if a collapse is possible, why is the euro is so strong?

It has been a head-scratching quirk of the euro debt crisis.

Because, while markets have been betting against economies in the eurozone, they have been much more favourable to the euro itself.

Even as Greece, then Ireland and then Portugal crumbled investors kept faith with the currency.

There is no easy explanation as to why this happened.

On one side, aside from the Swiss Franc, there are no other stellar currencies to latch onto.

The dollar is not considered the safe haven it was. Its own economy is a basket case, it has had its credit rating downgraded and the Federal Reserve will print more money whenever it has to.

The problems of Britain suggest it would be next should the euro fall. So sterling would depreciate.

Meanwhile, investors may believe even if the currency collapses, the remnants of the euro will nest in the haven of the German economy. This would be in a climate where the currency would not have the periphery countries to drag it down.

So, once the euro is not held in a country on the wrong side of the split, its value could rise as the new German currency reestablishes its place.

But if you knew exactly what to do to protect your reserves in the event of an unprecedented economic catastrophe you probably have a much better answer to this question yourself.

* What would Ireland lose if the euro fell?

A lot. To start, it would lose a lot of money. Practically, a new currency would have to be printed or at least the old one modified; bank machines would have to be adapted; every law with a monetary amount — such as fines — would have to be amended.

It would cut access to the markets which the country gained through the single currency system.

International companies would then have to ask themselves why stay here if we are no longer part of the currency club.

And we would have to walk the economic tightrope to decide how much is the new punt or Irish euro worth.

This is all before anybody begins to countenance the fact that the EU and its structures would be dead or have to frantically rewritten.

We, as a country under the protectorate of the ECB and the stabilisation facility, would also have to sort out how we pay our bills and debts.

* What is the plus side for Irish people?

Taking other economic factors out of the equation: People with deposits would lose. People with debts would win.

As an extreme case, a person can look to Zimbabwe. If a man in Zimbabwe owed his neighbour $1 in 2006, he still owed his neighbour $1 in 2007 (interest aside).

But, in the meantime, ridiculous inflation meant that $1, which was used to buy a loaf of bread, now would not buy a crumb from a similar loaf.

On day one of the death of the euro, the agreement between Irish borrowers and lenders would hold.

A €1 debt would, for simplicity, become a £1 debt. However, hyper inflation would invariably follow. And this would be in competition with high interest rates.

This is because in a currency-less abyss, in a country in effective default, the easiest way to restore the country’s balance sheet would be to devalue the currency.

Like Zimbabwe, that £1 would become very cheap very quickly.

Historically, we would look to peg our currency at some level consistent with the sterling, but this could only happen after Ireland steadied itself.

So those saddled with overpowering mortgage debts would see that whittled down. By the same token, locally invested pension funds would be worth little.

* What would happen if European leaders do not agree and the currency teeters towards collapse?

A legal and political nightmare. The eurozone, en masse, would have to decide to renege on some of the most important economic treaties ever negotiated.

This would leave it open to attacks, not just from reluctant members, but countries like Britain and Denmark who have signed up to the treaties but stayed outside the euro.

And, because economic agreements are intertwined with political developments, it is impossible to conceive of any structure within the current EU which could survive if countries simply decided to ignore the economic and monetary union.

For instance, how could any institution which draws some of its power and structure from either the Nice or Lisbon treaties remain intact if the Amsterdam and Maastricht deals were declared null and void.

* Can the strong economies not just strategically split up the euro to protect the core countries?

No. The published legal opinion of the ECB is that you cannot break up the currency without dismantling the entire EU.

Every guiding treaty would effectively need to be declared null and void, even a mar dhea split into a two-tier system could not be done without countries voluntarily taking a step back while retaining the rights of full members.

In 2009, the ECB summarised the prospects for both splitting options.

* A: Can a country opt out?

“Withdrawal from EMU without a parallel withdrawal from the EU would be legally impossible,” the ECB said.

* B: Can its peers kick out bad members?

“Expulsion from either the EU or EMU would be so challenging, conceptually, legally and practically, that its likelihood is close to zero,” the ECB said.

When the treaties were written, the eurozone, through arrogance or ineptitude, failed to make any real provision for what to do with problem states.

The punishments are almost farcical due to the extent to which they are inconsequential.

Up to now, policing economic behaviour effectively amounted to a power held by the eurozone, following consideration by the Commission and a vote by the European Council, to name, shame and impose borrowing sanctions on offending states.

The fact that Greece, in particular, rode roughshod over the rules while Ireland and Portugal paid no heed to structural-reform obligations, showcased the lack of fear.

Therefore, dismantling the euro, no matter how the big countries go about it, would need all of the members to sign up for dramatic changes which would most likely involve every state cutting off its nose to save everyone’s face.

Countries would have less freedom, would be subject to greater sanctions and, no matter how it is dressed up, would have to hand over economic sovereignty to a political system which, by its own admission, is remote and suffers from a democratic deficit.

Countries such as Ireland, who are already the subject of a bailout, probably would not notice the difference but for places like Finland, Poland, Sweden or the Netherlands they would have to pay the price for other’s failures.