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Leaving The Euro Is Hard To Do

A one-crown note from the Austro-Hungarian empire. i i

A one-crown note from the Austro-Hungarian empire. Wikimedia Commons hide caption

itoggle caption Wikimedia Commons
A one-crown note from the Austro-Hungarian empire.

A one-crown note from the Austro-Hungarian empire.

Wikimedia Commons

"I don't want the euro to fall apart," says Simon Wolfson.

Lots of people don't want the euro to fall apart. But Wolfson feels compelled to say so because he's offering a $400,000 prize for figuring out how to dismantle the euro.

Wolfson — aka Lord Wolfson of Aspley Guise — is the CEO of a big retailer called NEXT. He has argued against the UK joining the euro, but his company has stores all around the euro zone.

"This is a life boat in case the euro breaks up," he says. "No ship ever sunk for having too many life boats, and at the moment, the euro has no life boats at all. There is no contingency plan."

You might think leaving the euro would be easy. Greece, for instance, could just reverse everything it did when it joined. Replace the euros inside its borders with new Greek money. Bring back the drachma.

It turns out to be very difficult. There's a famous historical example here. Ok, it's not that famous. But it's worth looking at: The break-up of the Austro-Hungarian currency union in 1918.

Just as the countries of Europe today share the euro, the Austrian empire and the Kingdom of Hungary had created a shared currency: the Austro-Hungarian crown.

After World War I, the region broke up. All of a sudden there were lots of countries wanting to switch to their own currencies.

At the beginning, they used a simple system: Countries simply stamped existing Austro-Hungarian currency with particular markings to turn it into new, domestic currency. Some countries used ornate samps; Romania's stamp was just a cross.

This quickly led to chaos. Everyone wanted to get their money stamped in the country they thought would have the strongest currency. Countries sealed their borders, but it was no use.

"You had boxcar loads of currency" moving across borders, says Michael Spencer, an economist who has written about this period.

Imagine what would happen now, when people can move money with the click of a mouse. If some official in Greece even breathes a word about maybe, possibly, theoretically considering leaving the euro, money could fly out of the country before anyone had time to even think about sealing the borders.

"In principle if you could spring by this surprise on everybody, it can be done," Spencer says. "It is much more likely that people see this coming and then you could have the entire deposit base of your banking system flee over night.

In other words, there's a sudden, nationwide bank run.

Spencer says after the breakup in 1918, it was unclear for a while what the new currencies were even worth. Countries sometimes resorted to bartering. It took years for things to stabilize.

As a result, Michael Spencer doesn't have easy answer for Baron Wolfson's contest about how the euro might be dismantled. His advice to Greece and the other countries? Find a way to stick it out.

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