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October 6, 2008

Thought Experiment: Breaking the Euro

Lots of chatter in various circles, including my weekend comments, that we could see the banking crisis in the U.S. and Europe mutate into a currency crisis in Europe. It is not an idle question to wonder what it might take to break -- or maintain -- the Euro if stresses continue given massive bank bailouts, comprehensive deposit supports, etc.

Here is Wolfgang Munchau in the FT:

For Europe, this is more than just a banking crisis. Unlike in the US, it could develop into a monetary regime crisis. A systemic banking crisis is one of those few conceivable shocks with the potential to destroy Europe's monetary union. The enthusiasm for creating a single currency was unfortunately never matched by an equal enthusiasm to provide the correspondingly effective institutions to handle financial crises. Most of the time, it does not matter. But it matters now. For that reason alone, the case for a European rescue plan is overwhelming.

More here from John Mauldin's latest.

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