How the Eurozone Might End

Yves here. This post by Yanis Varoufakis gives a plausible scenario as to how the Eurozone could unravel. Most commentators believe the country that is most likely to rupture it is Italy. Italy has and also has a high saving rate, with the result that even under the gold-standard-like Eurozone, it still funds most of its debt issuance internally. Notice how quickly the Eurozone could fracture once one country exits.

By Yanis Varoufakis, professor of economics at the University of Athens. at

Six years have passed since the Shanghai Crash of 2032, and Europe’s architecture is incapable of responding to its challenges in a way that offers hope of continental consolidation after 30 years of hideous fragmentation.

The reasons for its conspicuous failure can be traced all the way back to Europe’s mishandling of the crisis then, occasioned by the latter-day Wall Street crash of 2008.

Our predicament in 2038 began with modern Europe’s ill-fated second attempt at a currency union, the so-called eurozone; the first having been the similarly ill-designed 19th century Latin Union. Modelled on the Gold Standard, with the radical addition of common banknotes, coins and a European Central Bank (ECB), the eurozone proved just as incapable of sustaining shockwaves from the 2008 financial meltdown as was the Gold Standard after the 1929 Wall Street crash.

A central bank without a state to back it up, together with member states now without the chief instruments of a central bank to back them, once liquidity dried up with the near-collapse of the West’s financial sector Europe experienced a domino-effect insolvency of some eurozone banking sectors and states. The false choice that suddenly gripped Europe’s leaders was either to accept the awful truth that the architecture of the euro was faulty and that large banking losses and public debts had to cancel each other out, or to do what, sadly, they did. This was to “extend and pretend” by having the eurozone’s sur nations pile huge new lo ans on the insolvent deficit states on condition that the latter agreed to reduce their national incomes, for that is what universal austerity accomplished.

For five years, Europe’s leaders stuck to their “extend and pretend” strategy. From 2011 onwards, and especially in 2013 when a banking union was proclaimed in name so as to prevent its implementation in practice, the writing was on the wall: the eurozone would disintegrate unless banks, debt and investment flows were somehow ‘Europeanised’.

The final stage of deconstruction began when the credit crunch reached its crescendo in the north of Italy and set in motion the process of “re-conversion”, as the eurozone’s disintegration was euphemistically called. The government in Rome, under immense pressure from businesses threatening to shift en masse their operations to the U.S. and to Eastern Europe, announced the introduction of an electronic unit of account in which tax payments would be made to the Italian state by businesses and households, allowing the government room to provide liquidity and tax breaks without the consent of either the ECB or, indeed, Brussels.

Amongst untold recriminations, Germany’s own central bank, the Bundesbank, told the ECB that unless Rome was reined in it, too, would create its own unit of account to safeguard German price stability. Almost immediately, an outpouring of capital from Spain to Germany caused Catalonia to threaten Madrid that unless Spain too created its own unit of account to lessen the impact of the credit on Catalonia’s exports, a unilateral declaration of independence would be on the cards.

Emergency summits of EU leaders led to fudges that left markets unimpressed. The capital flight from the eurozone’s periphery put enormous pressure on the ECB to activate its dormant bond-purchasing programme and to loosen its rules on the collateral to be held by commercial banks. Alas, a newly emboldened Bundesbank vetoed these moves. Meanwhile, the eurozone edifice was being tested daily by speculators, and Germany, the Netherlands and Finland announced they would issue a common electronic unit of account; the new currency that seven years later was to become the Thaler: a joint currency managed by the Bundesbank and commonly used east of the Rhine and north of the Alps, having been adopted too by Poland, the Czech Republic, Slovakia the three Baltic states.

The end of the post-WW2 Franco-German axis was as painful as it was significant, turning the European Union into an empty shell. The French government’s attempts to prevent the splitting up of the eurozone were hampered both by the Bundesbank’s dogged refusal never again to share authority over monetary policy with Paris, and also by the Banque de France’s undermining of its own government. Paris, exasperated, attempted a new Latin Union with Spain and Italy by issuing a new currency that it named the écu, hoping against hope that it would once again lead to a revived euro. Meanwhile, following the so-called Cyprus model, capital controls were introduced between the new currency zones, the Schengen agreement on the free movement of people faded away and the Single Market was reduced to no more than a name.

The failure of Europe in 2038 to respond constructively to the crisis that began in China, pushing Europeans even further apart from each other, can best be explained by referring back to the deep fault line that emerged in 2017 along the Rhine that divided Europe between the deflationary Thaler-zone and the stagflationary rest-of-Europe. If only Europe had taken a few simple steps back in the early 2010s to consolidate its banking sectors, to manage centrally part of its countries’ public debt and to design a common investment policy, then Europe might have had a chance.

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19 comments

  1. s spade

    I’m no expert, but this seems to suggest that the Eurozone could be saved by becoming a United States but without the military machine. I’m not sure our post 2008 experience supports this idea. We still have the debts piling up, the derivative casino, a loot driven executive class, government duplicity, fantasy driven propaganda about what we can and cannot afford, socialism for the rich and free enterprise for the poor. It is all bullshit all the time. Meanwhile, somehow the food keeps coming in and the garbage keeps going out, but for how long who can say?

    1. Yonatan

      Indeed. At one level, the Eurozone crisis is a distraction from the perilous state of the US economy. However, if it can be demolished in a controlled (i.e. non-violent) way, then there will be plenty of opportunities for the with US toilet paper to palm them off for firesale physical assets.

    2. craazyboy

      I think the dire scenario in the post could be completely avoided if Brussels would declare Greece to be a National Park. Then most Greeks could be employed as Park Rangers.

      The Greek shipping billionaires have jobs already, so they don’t need another one, but at least they wouldn’t have to pay taxes to support Northern European vacationers.

        1. craazyboy

          They can do anything they want, so long as they can get someone to pay for it. Without everyone issuing a new currency every 10 years to replace the last one that crashed, I mean.

    3. fajensen

      I think people are so fokused on the obvious that they are missing the significant. I mean, Everbody knows that Italy, Spain or Greece are not particularily shining examples of prudent management of money – because they never were to begin with. What everybody knows is hardly a risk that will blow up in your face.

      We should look elsewhere, perhaps. Denmark, f.ex., did the second largest bank-bailout package in the EU. Only the UK’s was larger. Nobody knows how much of the guarantee part of the resque package ended up as debt and who is holding it.

      That is the kind of risk that will blow up, because no one expects it, Denmark is never discussed in the context of the Eurozone even though it must be deeply entangled with it for the banks to need 700 Billion EUR and Getting Them!

  2. Joe Six-Packs

    This kind of articles are very funny to the American opinion makers but are so wrong…

    Welcome to the new world: mix politics with wishful thinking et voilá. Everybody jumps and get excited.

    Meanwhile the Euro against the American Dollar is at hihs in the last years. Who will you blame from the collapse of the former mighty Dollar? The Eurocrats?

    1. Yves Smith Post author

      Go to the back of the class.

      Did you manage to miss that Yanis Varoufakis is Greek and also was pilloried in Greece for saying the Greece would need a major debt restructuring (which was obvious but still verboten to say in public?) This isn’t an American opining on Europe. This is a European commentator who has a lot of cred among Europeans (and by that I mean outside Greece).

      And what planet are you on re the dollar? It has risen against its major trading partners: Japan (now at 100 v. 70-80 not all that long ago). The Euro is at 1.35. It was in the 1.145-1.50 range a few years back, as high IIRC as just over 1.60. It’s around 1.60 versus the pound, and it’s been largely in the 1.55-just over 1.60 range for a few years. It’s lower relative to the CAD and AUDn than it was years ago, but those are minor currencies. I’m not saying it’s good for the dollar to be where it is, but it’s not weak despite all the “Bernanke is killing the dollar” hysteria.

      1. I think the dollar is at grave risk at the moment and this is why Bernanke has been forced into retirement. CNBC’s Steve Liesman finally broke the silence on the matter of Bernanke’s forced retirement during the Fed’s last press conference, while Helicopter Ben had “no comment.” Meanwhile, the BoE under new “super dove” Mark Carney recently shocked the world when it disclosed QE no longer was necessary in the U.K. So, it appears London in effect very well could be insisting the Fed stop stoking conditions conducive to a Wiemar redux, and this possibly while supposing the NY Fed in all probability will be advocating QE until the cows come home, as the NY Fed is most aware of just how hopelessly insolvent are its member “banks.” So, I think there is a good chance the U.S. dollar is about to be officially destroyed, assuming the NY Fed gets its way. I would suggest, too, this is what the BoE is banking on. This wouldn’t be the first time the BoE acted to sink the U.S. Its pound sterling default back in September 1931 was designed to have this same effect. By all appearances a similar subversion very well could be at hand.

    1. NotSoSure

      Well, the Euro has stood up so far so the game (anywhere in the world) can go on for a long time indeed.

      Let’s take it one day at a time though. If Fukushima does blow up and the most dire consequences are realized, there won’t even be a Shanghai in 202X or 203x presumably and at that time EVERYONE will want to be in Jakarta.

  3. I think that “the Eurozone Might NOT End” if it adopts the idea of “gobanknoteless”.
    Google the term and find out how.
    Couldn’t be simpler!

  4. craazyman

    It’ll never happen. The Italians are too lazy for something like this.

    In 2038 they’ll still be writing predictions about the breakup of the euro. They may even recycle the articles from 2012 and 2013 and just change the names and dates. People will have long forgotten and won’t realize it’s a reprint.

    How much money will guys like me have lost believing doom and gloom prophecies? You make a mistake when it’s your money. That’s why the hedge fund speculators aren’t fools, because it’s somebody else’s money. If it’s your money, you better be really careful what you read. Really careful. It may be better just to watch sports on TV. Or even bet on sports. You won’t lose as much and you might get lucky. If you put money in the market, you won’t get lucky no matter what happens. Somehow, you’ll lose most of it and you won’t even know why. You might think it’s from reading articles about macroeconomics, but you’ll be honest enough to admit that’s only a theory.

    1. s spade

      Totally agree. My portfolio is doing much better since I stopped watching either it or CNBC, or paying attention to anything except the baseball season. Of course I am not making any money, but I am no longer losing any either.

      Neither logic nor information seems to be of any value when confronting the financial markets. Those employing either or both merely develop plausible explanations for losing money.

  5. “A central bank without a state to back it up, together with member states now without the chief instruments of a central bank to back them….” I’ve been saying this for years. The EU is a collection of sovereigns without sovereign currencies, and the euro is a “sovereign” currency in search of a sovereign. Consequently, a significant tool is missing from the EU’s kit. As for the break-up, just watch for the day (which is coming) when Germany can no longer support itself by forcing the rest of the zone to by German products via German loans. I think, though, that Merkel will unfortunately manage to leave the building before it collapses on her.

  6. Fiver

    We’ll have far bigger problems than a bust Eurozone on our hands in 2038, but my take on this is framed by the brute fact that the Federal Reserve, Treasury and Wall Street are not interested in any nation’s taking an independent course when it comes to globalization, let alone the enormous chunk of the American pie that is represented by Europe.

    What are these core centres of power going to do when presented with this line of thinking:

    “The false choice that suddenly gripped Europe’s leaders was either to accept the awful truth that the architecture of the euro was faulty and that large banking losses and public debts had to cancel each other out…”?

    Is there not a de facto veto waiting for any European move that had serious implications for US/European financial banks, investments, loans etc.

  7. Bapoy

    The Swiss are at the tip of passing an income guarantee and the Left is silent on this side of the pond?

    Why isn’t NC all over this?

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