What if Europe without the Euro

The current economic crisis is putting further stress on the euro, to the extent that its survival as the common currency of the 17 member states of the eurozone is now being openly questioned.

The two nations giving most support to the euro are also the two largest economies in Europe - France and Germany, which have opposing economic tendencies; France has statist leanings and is largely supportive of the euro (67% of the population are in favour) while Germany, a country which prefers a more conservative monetary policy, wants out (according to recent polls, only 30% of Germans want to keep the euro).

The ECB is nominally the central bank for Europe, but without Germany the ECB is only a monetary icon representing the interests of largely credit-strapped European nations.

The problem is brought into sharper focus now that there are early indications of a cooling in German manufacturing and services output. Over the last few years, Germany has taken full advantage of a cheap euro. This has fueled its export-driven economy, and the country now enjoys a huge trade surplus which it is using to support the early casualties of the euro crisis, such as Greece and Ireland. With elections on the horizon, a substantial element of the German electorate will be reluctant to vote for a party which pays for unrealistic social programmes in other eurozone countries. For example, the popular unrest in Athens and Paris over the raising of the retirement age to 62 does not resonate well in Berlin, where the retirement age is 67.

Despite all its denials, it would be imprudent of the German Bundesbank (or the Banque de France, for that matter) not to be making contingency plans to re-introduce a national currency; the costs to Germany of supporting the euro are set to overtake the benefits of an artificially weak currency.

Dramatic Implications

If the euro zone were to completely unravel, the implications to our industry would be dramatic; 17 'new' currencies would be required. The euro introduction surge saw 14 billion notes printed for the 11 eurozone countries in 2001. With the enlarged eurozone and the need to put new currencies into circulation as quickly as possible, there could be a one-off demand in excess of 20-25 billion notes.

Of course there are other scenarios - the favourite being a euro minus those countries with failing economies, which would, in effect,  allow them to 'devalue' with their own new currency and recover. Another scenario is Germany pulling out as its economy is much too strong compared with those of the others; the new euro being led by France and embracing fewer countries - probably without the defaulting nations.

The major problem right now is the uncertainty. The financial world is in turmoil, economic growth in Europe is on hold or in decline and 8.45 billion banknotes are currently being printed that may not be required!

And what about Euro Series 2? Just as the technical problems appear to be nearing an end, is there any point in launching it until the situation becomes clear? Who will make the investments in new machinery (it is strongly believed new machinery will be required by some producers) if the euro's future remains in doubt.

US Dollar Under Threat

The euro is not the only currency under threat - the US dollar is also having a shaky time of it. And while the euro affects 17 participating countries directly and also other countries in Europe outside of the eurozone, the dollar may only relate directly to one country, the USA, but it affects the world as its reserve currency (a position it has held since the end of the 2nd World War and the Bretton Woods Agreement).

The US debt is so huge now and with the country's massive spending commitments for the future, many believe the only way for the dollar to go is down, and considerably so, as only if this happens can America hope to pay its debts.

But those holding US dollars and dollar-denominated bonds would not be happy if this happened, and the US would stand to lose billions annually in seigniorage. However, China is already calling for a new global reserve currency and many believe it is inevitable. Should this come about soon, of the 7 billion $100 bills in circulation, the majority will not need to be replaced and the volumes of other high dollar denominations will fall.

Although such a move does not appear imminent, it is certainly a possibility in the future, and maybe closer than we think.

Would the new reserve banknotes be physical? Would they be designed and produced by the private sector? Who would hold and distribute them? Would they be legal tender and used every day by the public? There are currently more questions than answers in Europe, the US and globally.