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Will a silent bank run be the next phase of the Euro crisis?

David Levine, professor of business administration | December 10, 2011

As the great physicist Neils Bohr famously stated, “Prediction is very difficult, especially about the future.”  I cannot tell what nations will remain in the Euro.  If Greece (for example) decouples its currency from Germany’s, I do not know if it will do so by quitting the Euro, by being asked to leave, or perhaps by having Germany and some of its neighbors quitting the Euro first.   Nevertheless, everyone agrees there is some chance that Greece, and perhaps also Portugal, Spain and even Italy will end up with a different currency from Germany.

Unfortunately, the Euro was created without any mechanism for departures.  Each departure leads to the risk of massive devaluation, so 1000 Euros in a Greek (for example) bank may convert to 1000 “new Drachmas” worth only 400 Euros.  Even that massive loss is only part of the story, as nobody knows how long Greek banks would close during any transition—and Greeks would presumably have no access to their money during such a bank holiday.

Fear of such a devaluation has led savers to move billions of Euros from banks based troubled nations to safer foreign-owned banks.  Due to the common market, those foreign-owned banks may have offices literally next door to the Greek- or Spanish-based banks in Athens and Madrid.  At the same time, billions of Euros remain deposited at banks based in troubled nations, implying that tens of millions of savers in these nations are speculating with their life’s savings.

European leaders have made numerous moves with the intent of stemming the crisis.  So far none have been far-reaching enough to permit Greece (for example) to repay its debts.  The Euro’s survival depends on the next moves doing what the many past attempts have not: reassuring everyone that the most troubled nations can remain in the Euro.

One way we will know if European leadership has failed is if we see an accelerating silent run on banks in Greece and other nations already in trouble.  Unfortunately, such a run can be self-fulfilling, as widespread withdrawals from Greek, Spanish, and perhaps other banks can bring about precisely the crisis that depositors fear.

Comments to “Will a silent bank run be the next phase of the Euro crisis?

  1. Many believe that Greece and perhaps other countries could end up in a “corralito” ( corralito explain, wikipedia).
    Surely we have done many things wrong, the lack of a common government in the euro area has been one of the causes. On the other hand, if these countries were not in the euro area they have suffered (or benefited) a devaluation of their currencies, which would have enabled exports and improved economy.

    Currently the only solution seems to be a painful internal devaluation.

  2. To prevent a bank run, the EU needs to guarantee deposits across the entire eurozone (a euro-wide FDIC), as opposed to letting national governments do that. But given the inherent costs in this, and the lack of mandate, I doubt the European Commission will think so boldly.

    Not only does monetary union without fiscal union doomed to failure, but it also fails when monetary union lacks a unified framework of financial regulation. The markets will force the issue, and the Eu bureaucracy is not wired to respond quickly. The curreny is doomed.

  3. The reality is that there is no free lunch (cf. First Iron Law of economics: The two iron laws of economics). What appears cheap today has inevitably to be paid for through future pain.

    The European monetary union is ill-designed for the challenges of a modern economy, and it would be much better if currency is entirely privatised (subject to prudential regulation). That way we would not depend on the random and ad hoc actions of governments to “negotiate” a solution and create sharp discontinuities.

    Far better, I’d suggest, for Europe (and the West more generally) to bite the bullet and privatise currency, something that is long overdue. This is going to be painful, but the writing is on the wall. All centralised control over currency is destined to fail.

  4. ^^^ are you high?

    The secret sect Monarchs & privileged clowns? Sorry, but capitalism ONLY works when there are three separate and distinct groups of people; the wealthy, the middle class, and the poor. Eliminate one and you eliminate all three. However, these distinctions matter little when each term is relative . . . (e.g., those who are in “poverty” here in the states have air conditioning, a cell phone, and typically at least 2 meals a day. Drop that person in Sub-Sahara Africa . . . and they are the wealthy.)

    So please, put down the pipe, and come back to the conversation when you can type coherently again.

  5. Wow. Educated leaders can do much better than just come apart at the seams. Unless such an atmosphere has already been formulated thus the elimination of the Nation State. Then Economists & Governments can gallantly advance societies N leaps & bounds if they so wish 2 do-so.The secret sect Monarchs & privileged Clowns have no place N today’s field of action. So Hi don’t B shy give it a try & Welcome 2 the Fore.

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