What would happen if the Euro failed

Hollister11

I hear all these reports that if Greece default the euro will fail. What would happen if the euro fail. What would happen to mortgages, prices of goods, out Savings ect.

andrew

Hollister11 wrote: »

I hear all these reports that if Greece default the euro will fail. What would happen if the euro fail. What would happen to mortgages, prices of goods, out Savings ect.

Supposing it did go that far - and even if Greece did leave the Euro, it's unlikely to go that far (any time soon, anyway) - it's not clear what would happen, because there are huge number of factors at play, and then there are the different time scales to think about.

In general though, if the euro failed each country would return to using it's old currency; a new punt, a new lira etc. If your mortgage was with an Irish bank, the contract would be re denominated into punts. Your savings would also be converted into punts - every contract bound by Irish law would presumably be re denominated into punts.

It's very tricky to tell what would happen to prices, because this depends to a large extent on how much money the Central Bank would make, and what type of currency regime to have (do we let foreigners hold punts or restrict it to Irish people), and how much foreigners want to hold our money (if possible). You could probably expect there to be inflation, as this would be a quick way to gain competitiveness, but I don't think our institutions are so bad that there'd be hyperinflation or anything like that.

The resulting recession would be massive on top of the switch from the Euro to the Punt, and interact with the re denomination in all sorts of ways. So practically it's easy to say that everything gets re denominated, When you start trying to consider all of the interactions...it's safe to say nobody knows.

To be clear though, a complete breakup of the Eurozone as a direct result of Greece's exit in the short run is still unlikely, as far as I know.

Hasschu

What is most likely to happen to the Euro is that it will not fail but it will contract. The core is likely to be composed of Germany, Austria, Nederlands, Finland. The PIIGS are likely to exit one by one with France being the one that will break the camel's back. The Eastern Bloc countries and Slovenia are also not doing well under the Euro.
Under the Euro, Germany is the clear winner as funds flee the PIIGS+ to Germany as a safe haven. Thus ensuring Germany basks in a high liquidity, low interest environment.
By remaining in the EZ most members are operating at a disadvantage and Germany will not relent due to an inflation phobia acquired during the hyperinflation known as the Weimar collapse of the economy in the 1920's which led to National Socialism and the second world war. They are in a self righteous mood and have no intention of levelling the playing field.
So the Euro as a currency will survive but individual members will withdraw.
If you have a lot of investments prepare for an Argentina like experience. They were locked into one Peso = one US Dollar and suddenly one Sunday evening without notice one Peso became three Pesos to the US$. This scenario will play out one country at a time and could take decades to stabilise. No one can predict the first country to depart as the decision making will be highly political driven by mobs in the street. That said Ireland has proven it can take punishment without retaliating so we are not likely to be in the first five countries to exit. Keep in mind that there will be no notice, just an announcement on a Sunday evening that Banks will be closed for 72 hours and when they reopen your Irish Euro (Punt) will be worth 25C, 50C, 66C, 75C of the existing EZ Euro. Granted they will likely call it the Punt to avoid confusion.
I was in Argentina and saw first hand the shock that people suffered. The good news is that exports of goods and services as well as tourism picked up in the following two years and brought about lower unemployment.

Hasschu

Here is a link to what happened to Cyprus. Note the suddenness with which bank/central banks fail.

www.zerohedge.com/news/2016-03-25/if-your-countrys-broke-dont-hold-all-your-savings-there