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.