Just like old times

Industrialists and bankers are starting to think seriously about what would happen if the euro broke into several national or multi-national currencies. The result of such analysis is bound to be alarming. Technically, however, the transition would be far from impossible.

For companies which make things or sell services, the best way to face a post-euro world is to relearn the tricks of pre-euro trades. Companies used to buy, produce and sell in many different European currencies. They could do it again. Highly leveraged companies would struggle if their debts were redenominated into stronger currencies than their revenues. For most enterprises, though, foreign exchange would quickly become just another headache of conducting business.

For banks, the end of the euro would be more like the combination of a stroke and a heart attack. In weak post-euro countries, funding would be scarce and deposits would leak past capital controls. In strong post-euro countries, there would be big write-downs on loans made to the weaker brethren. And, if the dissolution of the euro slowed the economy, as it probably will, loan losses would increase everywhere.

Still, when it comes to adjusting to a new regime, money and credit have a big advantage over goods and services. Financial stuff can be created at will. With a little cleverness, some political nous and a lot of hard work, newly important national central banks should be able to reconstruct their institutions’ balance sheets. The dissolution could even be an opportunity to decrease leverage.

Technical solutions can be found for the technical difficulties of transition to a post-euro world, although it would help if there were a few months to get ready. Political problems are another matter. If the euro-era ended fairly peacefully, EU politicians could blame financial markets and vow not to reverse European integration. But, bitterness about the failure of this great experiment would fester. It would be hard to avoid restrictions on the movement of capital. Nationalist regulation would grow. The whole European project would be in danger of dissolution. Indeed, the near inevitability of a European Disunion is the thing inspiring political leaders to avoid the post-euro path.