Breaking up the euro

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It is no longer forbidden to mention exit from the monetary union.

Ten years ago, in the run-up to the launch of Europe’s single currency and in its aftermath, Euromoney journalists used to play a rather childish game with European politicians, central bankers and regulators.

We would always ask them what fall-back plans were in place for an eventual break-up of the single currency. The joke was that they could never admit to any such possibility. There were no plans... because it could never happen.

Euromoney could devise plenty of circumstances in which various countries among a group whose economies were prone to boom and bust on separate cycles would want to escape from the constraint of a single interest rate and a currency that could not be devalued. It seemed ludicrous that the single currency required an almost religious leap of faith and that otherwise rational economists and bureaucrats must simply deny any chance of a country ever wanting to leave or being expelled by the others.

And so Euromoney was shocked and strangely gratified to read the words of German finance minister Wolfgang Schäble writing in the Financial Times on the tortured moves towards bailing out Greece. "If a country should find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union."

There, that wasn’t so hard to say, was it?

Germany might be regretting how easily indebted and profligate countries circumvented the Maastricht rules designed to keep them out of the single currency.

It wasn’t just Italy and Greece using the swaps market to dress up as income what were really loans that would build up their debts. The core countries as well resorted to all manner of schemes – private finance initiatives, state development banks and other agencies – to push off balance sheet their real and contingent exposures.

Economists are starting to wonder if Germany is now playing a new long game, accepting short-term convulsions in the euro with a view to weeding out the fringe nations and returning to the ideal of a core strong European single currency as successor to the Deutschemark.

In the aftermath of the financial crisis, Ireland pushed through steep budget cuts to shelter more closely under the euro umbrella. Will others follow? And has the single currency hurt the core as well as the fringe of Europe?

Markets should perhaps look past the Greek bailout being cobbled together. This might be a first and a last in the eurozone. As Gabriel Stein at Lombard Street Research suggests, it might be dawning on German politicians that rather than bailing out Greece directly, it would be better if Germans bought goods and services with a strong euro from neighbours with weak drachmas, liras, pesetas and escudos.