In the absence of plan ‘b’

Many readers have been asking about the mechanics of any hypothetical ‘euro’ break-up, or indeed of what might happen if one country were to leave. Up to now, we have been told this is impossible, but clearly it is possible, and, however remote the possibility may seem (the order of 5% risk is the topical response) institutions in the financial sector cannot be without a plan ‘b’. In this context, this article, I found whilst idly noodling around the net, could be seen as informative. It is written by a software engineer for a magazine called Software Reality. The article’s title: reverse-engineering the euro.

Banks must start to plan for one or more European countries leaving the Euro. We all thought that after the Y2K and Euro changes, we wouldn’t be doing it again, but it appears we’ll have to.

The possibility is real and banks have a duty to shareholders to mitigate against such risks. If we start now we may have a few years, which is just about the right timescale for planning these things.

Technically I don’t think that there will be a great deal of software that needs to be rewritten. As I said earlier, the front office doesn’t really care about countries and the back-office holds the relationship between countries and currencies in their counterparties.

An important aspect of software development is whether data providers such as Reuters and Bloomberg can convert their systems to handle the new currency. Whilst the trade capture software might not require a great deal of modification, any new currency would affect all financial instruments (especially FX), and a new German currency would have the greater impact on financial markets.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

7 thoughts on “In the absence of plan ‘b’

  1. Commenting quickly on my own post, I had to think twice about posting this. On the one hand I am convinced that the more something like this is talked about, the more likely it is to happen.

    On the other hand, there is the issue of transparency. I don’t think educated citizens of a modern democracy should be kept systematically in the dark about topics like this. I have come to the conclusion that the second argument weighs over the first. The damage to our democracy of having debates about currency systems which were only possible in private, and behind closed doors would, in my view, be immense.

    If the euro isn’t able to survive on its own merits, with citizens aware of the real possibilities, and able to evaluate them for themselves, then this would already be a grave admission on the part of its proponents.

    Finally, I think a situation where everyone wakes up one day simply to be informed on the telly that the banks have closed for the week due to currency transition, would be totally unacceptable.

    If the euro survives, it will be because it works, and if it fails it will be because it doesn’t work, not because ‘skeptics’ like me keep people informed.

  2. It is of course not your speculation to keep bottled up. Analyses like this are about to become commonplace.

  3. It also serves as a reminder that such actions would have real costs. At just this moment, there’s an explosion of cheap rhetoric, “Ditch the constitution!” “Scrap the euro!” “Leave the Union!” that’s serving to vent a certain amount of public frustration, but there’s no sense of the downside of these sentiments. (It’s not like people are cheering things like “More inefficiency!” “Competitive devaluation!” and “State rivalries!”)

    If leaving the euro zone is a real option, then it will have costs, too. Pretending it’s a freebie does no one any good.

    Eventually, of course, the debate itself becomes a cost, as the hardy perennial over UK withdrawal demonstrates.

  4. “If leaving the euro zone is a real option, then it will have costs”

    Of course it will have costs, Doug. No-one is taking this likely. But imagine a group of incompetent architects design and build a huge tower, one day it starts to creak. Other architects who knew the designers weren’t up to the job, shout: lookout, that thing is going to fall, someone might get caught under the rubble. Who are the ones responsible, those who designed the building in the first place, or those who simply try to get people out from underneath.

  5. Didn’t the Spiegel article mention that German MPs had asked for a legal analysis from Bundestag staff of how Germany could withdraw from the Euro? Has this report been further discussed? Is it available?

  6. “legal analysis from Bundestag staff”

    Yes, this was a legal assessment of the possibilities. Has it been discussed, well we did in the comments thread on this post:

    But generally it hasn’t. This, as you can probably see, isn’t a topic that gets discussed dispasionately on its merits. I don’t think it has been debated in the lower house. Is it publicly available, I really don’t know, but it would be full of legal jargon I imagine. The gist is in the mentioned thread.

  7. Doug,

    “More inefficiency!” – well, I wish that the Brussels EU central be as inefficient as possible. When it’s too efficient it produces tons of regulations that pollute the European economies making them inefficient.

    “Competitive devaluation!” – nobody loves to use fire extinguishers, but in moments of emergency you can only be lucky it’s available. However, personally, I strongly prefer depreciation under the free floating regime to devaluation.

    “State rivalries!” – speaking about international competition, it’s precisely what has driven Europe forward. EU needs more competition among member states, not less!!! That’s the only way that keeps the fat cats from Brussels at bay.

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