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2011-07-20

Stephanie Flanders, BBC Economics editor: But how, exactly, would the euro break up?

But how, exactly, would the euro break up? Now we can see very clearly how it would happen, thanks to a highly illuminating disagreement between the German government and the European Central Bank (ECB).
Stephanie Flanders, BBC Economics editor, 19 July 2011, 13:12 GMT

Most countries suffering financial crises have one crucial weapon at their disposal: they can print money.
That means, even if they have to default on their foreign currency debt, they can always print enough domestic currency to stand behind the deposits in their banks.

As we know, that is not the case for countries in the eurozone.

It's not strictly necessary for people to go to the trouble of opening German bank accounts.

If ordinary Greeks simply withdraw euros in cash and hoard it under their beds, you get the same effect.

(RE: En grekisk regering kan tvinga banken att omvandla eurokonton till drachmakonton, men eurosedlar i madrassen är ändå alltid rosor.)

Greek banks going to the Greek central bank to get extra euros, which the Greek central bank has then to get from the ECB.

At the limit, all of Greece's bank deposits leave the Greek banking system - and end up as liabilities on the balance sheet of the ECB.

We're not there yet.

But as I've discussed many times (see, for example, my blog of 8 December 2009), the ECB has been acting as the backstop for Greek banks, providing them with emergency cash

Critics say that the ECB is forcing a crisis, by insisting that it will cut off funding for Greek banks in the event of a default. But the reality is the crisis is already here.

What the ECB is doing, rather, is forcing governments to decide how it is going to be resolved.

The leaders who will meet in Brussels on Thursday still have the power to decide whether this crisis is going to end with much greater integration and burden-sharing between the governments of the eurozone - or a dramatic break-up.

But they are increasingly losing control of the timing.

Full text here

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