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Should investors dump the Deutschemark?
However if the euro ceases to exist, holding euro cash or bank deposits in Germany is unlikely to provide the safe haven some investors believe.
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If the euro ceases to exist, holding euro cash or bank deposits in Germany is unlikely to provide the safe haven some investors believe. (Shutterstock/File)
I
do not believe that the euro will break apart. Monetary unions very rarely breakup — the process is economically, socially and politically traumatic. A breakup of the euro would be considerably more painful than the breakup of a fixed exchange rate regime.
However if the euro ceases to exist, holding euro cash or bank deposits in Germany is unlikely to provide the safe haven some investors believe.
Every monetary union breakup in the 20th century was preceded by dramatic capital movement; monetary union breakups are driven by bank runs, not politicians. Money moved into the economy that investors believed to be strongest.
The Austro-Hungarian breakup of the 1920s saw money move to Hungary. The United States breakup of 1932 saw money move to New York. The Czechoslovakia breakup of 1993 saw money move to the Czech Republic. If the euro broke apart money would almost certainly move to Germany.
Moving cash into a strong economy seems logical. If someone in France fears France may leave the euro in the future, and if they believe the French franc would be a weak currency, it makes sense for them to take money out of their bank in euros while they still can.
They could hold that money as physical cash, believing a euro in hand is worth more than a franc in the bank. Alternatively, they could move their money to a German bank, thinking that whether they get euros or Deutschemarks in the future they would hold a stronger currency than the French franc. Thus money flows into Germany.
If after such inflows all the euros in Germany were converted into Deutschemarks, they would represent claims on German goods and services (that is what money is). Claims on German output would surge but German output would be unchanged. Put another way, German money supply would explode relative to German GDP.
