Is it conceivable that the Euro ends?

The FT, The Economist, and the NY Times have all run articles pondering whether the Euro might end; here is another typical account.  If so, how would the end come?  Would Italy pull out to keep excess budget deficits?  Would Germany pull out on the belief that it would do better with its own monetary policy?  Might a "sound money country" pull out if the other members seek Euro inflation to stimulate their economies?

The arbitrage dynamics are tricky.  The Euro was introduced slowly and with a competent marketing and information campaign.  In contrast the end would come quickly and in a less cooperative setting.  Imagine a major European nation announcing that its citizens had six months to reconvert Euros back into a national currency.  How would the government know what the conversion rate should be?  Set the rate too high and a wrenching deflation will be required.

People had a good idea what the Euro would be worth but the road back would involve much more uncertainty.  I don’t even know if a resurrected deutschmark would be a stronger currency than the Euro (I can, however, give you my guess on the lira).  And wouldn’t either everyone in Europe, or no one, wish to cash in to the new currency right away, depending on the conversion rate and the associated degree of credibility?  Don’t currency substitution models, and all their tricky implications (it becomes very difficult to control prices), come into play?  Might short-term interest rates go whacky?  What would be the domino effect on, say, Polish asset values?

I’ve never been a huge fan of the Euro, but these are scary questions.  It would be ironic if the strongest argument against the Euro was simply the eventual need to dissolve it. 


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