The Grexit, or Greece’s exit from the
euro, is becoming more likely, judging by how frequently it is mentioned
these days. Unfortunately, preparing for it may be more difficult than many
believe. Before addressing that point, I would like to first illustrate the
extent of the problem.
This chart was included in an excellent article by Mish (a/k/a Mike Shedlock) on his Global Economic Analysis website. He notes: “One chart is all it takes to prove a
full-fledged European bank run…is well underway in the Club-Med
countries and Ireland”, i.e., the so-called PIIGS.
There is a lot more in Mish’s article,
which I recommend reading. But I would like to use the above chart to make an
important point about the Grexit.
It is clear that money is flowing from the PIIGS into Germany, and the
reason is simple. People in these periphery countries are fearful that if
their country leaves the eurozone and their
national currency is re-launched, they would lose purchasing power. This
problem is particularly acute for the Grexit, as it
is widely believed that a new drachma would be worth 40% less than the euro.
A devaluation of that magnitude is necessary to make the Greek economy
competitive once again. But note the title on the above chart –
“Net Claims of National Central Banks within the Eurosystem”.
There are two important points to make.
First, Germany is in effect lending money to these countries through
the ECB and the so-called Target system. If Greece exits the euro and changes
its external liabilities to Germany from euros to drachmas, Germany would
take a 40% hit on its asset. Is Germany willing to accept that big loss? Note
from the above chart that the PIIGS owe Germany €640 billion. This huge
debt is about 25% of Germany’s GDP, and it doesn’t even include
all the other debts owed to Germany by the PIIGS. One has to ask, what will
Germany do to protect itself if any of the PIIGS leave the euro?
Second, each European state has a national central bank, which
contrasts to the US monetary union where the dollar circulates within the
American states. If money moves from California to New York, there is no New
York central bank to record that state’s claim on people living in
California. But Germany knows exactly where all of the euros flowing its way
are coming from on both an aggregate and individual basis. In other words,
the euros from the PIIGS are deposited in German banks, and every bank knows
the name, address and nationality of each depositor.
So let’s assume Nico transfers euros
from his Greek bank to his bank account in Germany before the Grexit. Nico thinks his euros
are now safe, but are they?
What if the Eurocrats in Brussels decide
that Nico was “speculating” with the
“hot money” he transferred to Germany? Even though Nico was simply acting prudently seeking what he thought
was a safe-haven for his life savings, which were held in euros, the Eurocrats could easily make the claim he was speculating
because he moved the money out of Greece, his home country.
So to put their words into action, the Eurocrats
determine that coincident with the Grexit and
re-launch of the drachma, all euros deposited in banks anywhere in Euroland by Greek nationals becomes a drachma deposit.
Germany is saved because it no longer owes euros to Nico.
But Nico’s life savings are not safe after
all. And the same thing could happen to Juan, Paddy, Luigi and their
countrymen in the PIIGS, if they think that moving their euros to Germany is
There is only one way to seek safety from fiat currency – exit
the fiat currency system altogether. The only way to do that is to buy
tangible assets. Nico should have instead bought gold.