18 of the 28 EU states make up the Eurozone. If the Euro collapses 18 new national currencies will have to be established. A conversion rate for Euros to each re-established national currency will have to be agreed. The weaker a country’s economy, the less favourable the conversion rate.
That will be painful for the weaker Eurozone economies, but it will be administratively relatively simple because the transaction can be made bilateral, just as the assimilation of the East German Ostmark into the Deutschmark was accomplished at the time of German re-unification, although this would be more complicated.
The bilateralism would have to come through a system something like this: the Euro coins and notes issued in each country’s name and the Euro bank deposits of each country held at a certain date would be convertible only into the re-established national currency. For example, this would mean that those holding Euros issued by France and Euros in French bank accounts at a designated date, would have their Euros converted to Francs at whatever the agreed rate was.
Unless such a system was adopted almost everyone holding Euros would demand that their Euros were converted to attractive currencies such as a re-established Deutschmark rather than a new drachma or escudo, regardless of how attractive the conversion rates were for the weaker re-established Eurozone currencies. This would happen because the weaker re-established currencies would be viewed by most as potentially worthless at worst and likely to devalue severely and quickly at best. There would also be no guarantee that all the newly established currencies would be freely convertible.
The domestic administrative complications will be daunting enough, but they will be nothing compared to those that arise for those holding the Euro as a reserve currency. As the Euro is a supranational creation, there can be no neat conversion of Euros held as a reserve currency to another currency as there was at German re-unification. Instead, each holder of Euros as a reserve currency would probably have to receive a basket of currencies made up of all the 18 Eurozone’s new national currencies with the amounts of each currency determined by some criterion such as the size of population of each Eurozone country. This would mean substantial losses for Euro reserve currency holders, because most of the basket of 18 currencies they received to replace the Euros they held would be currencies which were weak and hence undesirable internationally. Only the new Deutschmark would probably be considered genuine reserve currency material.
In 2013 currencies held in reserve throughout the world amounted to about $11.4 trillion . The Euro is the second largest reserve currency after the dollar with $1.5 trillion plus a significant proportion but unquantified in proportion of over $5 trillion of unallocated reserves. The effect of a Euro collapse would be massive, not just on the EU or even the developed world generally, but on the entire world because the developing countries hold the majority of the $11.4 trillion, much of which will be Euros.
The potential damage the collapse of the Euro would wreak may be the primary explanation for the ruthless treatment of Eurozone countries such as Greece, Spain and Portugal in the struggle to maintain the Euro, although the contemptible desire of the EU elites to save face at any cost is doubtless also in play.
A subsidiary problem is how non-reserve currency holders of Euros (individuals, business, other corporate bodies) outside the Eurozone would be treated. It would scarcely be a practical proposition to hand them a basket of currencies like the reserve currency holders because the vast majority would be holding only a small or relatively small number of Euros. For those holding just coins and notes there would not be a problem because those notes and coins would be identifiable as having been issued by a particular state and could be converted at the agreed Euro/re-established currency of the particular country rate just as the notes and coins held by those living in Eurozone countries could be converted. Ditto any Euros held in banks in Eurozone countries regardless of the nationality of the holder or their place of residence, the state in which bank account is held being the determining factor.
But a severe problem would arise with those holding Euros in bank accounts outside of the Eurozone. How those Euros could be allocated to any Eurozone member by any rational or objectively fair scheme I frankly cannot see. I suspect that they might have to settle for either a basket of Eurozone re-established national currencies as the holders would do (impractical for small amounts) or whatever (almost certainly decidedly penal) conversion rate each ex-Eurozone member might be willing to offer. For example, France might offer a better rate than Germany. The foreign holders of Euros in bank accounts could of course simply be cut adrift and lose the entire value of their Euros.
Then there is the problem of what to do with contracts drawn up in Euros. What value would be put on the Euro cost of the contract? I suppose it might be dealt with by using the conversion rate of the Euro to each Eurozone ex-member’s re-established currency with the place where the contract was to be carried out determining to which newly re–established currency the contract would be converted. Or perhaps the contract could be converted to another currency such as the US dollar or pound sterling with payment either being made in that currency (which the contracting party doing the paying would have to purchase using their own currency or any other foreign currency reserves) or in a newly re-established national currency at whatever the exchange rate between that currency and what might be termed the third party currency was at a moment in time. For example, suppose the third party currency was the US dollar and the ex-Eurozone state was France. Francs would have to be given to the value of whatever the exchange value of the Franc against the dollar was, either at its value at a given date or at an agreed conversion value.
The potential mess is colossal. What if a newly established currency is simply too weak to be able to either buy sufficient of a currency such as the US dollar or to make payment in a new re-established national currency because the exchange rate was so penal it made the completing of the contract impossible? What if the contractor who is to be paid refused to complete the contract because they had no faith in the newly re-established national currency? What if a newly re-established currency was not strong enough to be fully convertible? The outcome could be very severe because of the potential for a large shrinkage of economic activity across a healthy slice of the world’s economy. What will happen generally if the Euro collapses? The stark truth is that no one knows because there is no historical example of a currency union on the scale or type of the Eurozone failing . The nearest example is the Latin Currency Union which lasted from 1865-1927, but that was small beer compared to the Eurozone ,based on precious metals and not involving a reserve currency. Nor of course was international trade and finance developed to anything like the extent it is today.
The architects of the Euro, whether intentionally or not, have behaved with a criminal recklessness in venturing where no one had gone before.