How risky would the end of the euro be?
January 11, 2012
Q: If the euro comes to an end, what should the holder of a German bank account do with these funds? Will the euros in the account simply be revalued in a new German currency? Would the exchange rate from euros to this new currency be more favorable given Germany's superior financial condition, compared to other countries in the euro zone?
A: Here are two things you can say about this situation:
- If the dismantling of the euro happens, it will be chaotic.
- Germany is better prepared than most to weather the storm.
A year ago, dismantling the euro would have been unthinkable, but now Germany has to be seriously considering an exit strategy. Even though Germany has maintained its strong financial position, it has seen its interest rates rise because it is issuing bonds in a tainted currency (i.e., the euro). That gives Germany a strong incentive to find a solution, which may mean kicking some countries out of the euro zone, or going it alone.
Of course, Germany could continue to try to orchestrate a bail-out of the current euro, but if conditions in Europe continue to deteriorate, Germany could see the euro devalued relative to other major currencies. That represents a significant risk to Germany -- and to your euro-denominated account.
In the event of a transition away from the euro, while you are correct about Germany's superior financial condition, this would not mean a favorable exchange rate from the old euro to a new German currency. In the topsy-turvy world of currency exchange, strength can be a drawback. A weaker currency can "afford" less of a stronger currency, so an exchange from euros into a German currency might yield less than you might think. In theory, this shouldn't matter if the German currency remained strong after the exchange, but it does make you vulnerable to a valuation inefficiency at the time of the exchange.
Speaking of exchange rates, there is another risk factor to consider if you are living in the United States. Your account will not only be affected by the exchange rate from euros into a new German currency, but also by the ongoing exchange rate between the dollar and that new currency. If you think of your German account as a conservative savings account, you might find yourself taking much more risk than one would normally associate with savings accounts due to currency fluctuations.
Those fluctuations might come fast and furious in the uncertainty surrounding the transition, and in the early days of a new currency. If you want to save yourself some volatility, this might be a good time to start checking out U.S. savings accounts.
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