Some euros are more equal than others

John Kay on the inherent flaw in the single currency once a route to euro exit is created for peripheral countries:

The growth of indebtedness of the weak euro currencies to the strong has already happened and is continuing. When Europe’s leaders claim the continent is now better placed to withstand a crisis they mean only that this accumulation has been largely transferred from the private to the public sector, mainly the European Central Bank. Since there is potentially no limit to the willingness of the private sector to exchange weak euros for strong, the only limit to the process is the patience of German and Finnish taxpayers. So check whether the euros you hold are eagles or owls before others do.

I don’t expect the Germans would call time on the euro. It would be too destructive and would trash the country’s reputation for decades. (Though they’re willing to engage in brinksmanship, with suggestions they may have considered voting against allowing the Bank of Greece to do ELA for its banks – the only mechanism I can think of, assuming they could convince two-thirds of the 23 ECB council members to back them, to actually force a country out of the euro.)

But as I’ve said beforeand as Wolfgang Münchau argued earlier this week – you don’t need a Rubicon-crossing initial euro exit for this to happen; only a continuing asymmetry between a continental currency and national deposit guarantee and bank resolution authorities.

This is the immediate problem Europe needs to fix.


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