What If, the Euro collapse ?
Let us start off by saying that we do not see the Euro collapsing and being shelved, at least not yet, anyway. No exit process was written into their rules anyway. But it is technically possible, so better to be forewarned.
The former Governor of the Bank of Israel, Prof. Yaakov Frenkel, has predicted a possible collapse of the Euro within the next three years.
Frenkel was quoted by the Bulgarian news agency BTA as saying that if European Union leaders fail to deal successfully with the Greek financial crisis, the European currency would not survive.
Simply put, the Eurozone would revert to what it was before the Euro existed. The European Central Bank would have to return all of its gold to the member States in proportion to their initial contributions. Their old currencies would have to be resurrected and Euro reserves converted back to the mix passed to the European Central banks from the beginning of the Eurozone.
Dollar reserves would be built up again to replace the lost Euro reserves.
The world's Foreign Exchange Markets would be in chaos. Confidence in most if not all currencies would almost disappear. By extension the ripple effect through the economies of the world and business in general, would be destructive. There would be a huge scramble for all hard assets, but particularly precious metals. Briefly the U.S. Dollar would reign as king.
More likely the Eurozone will shrink first. The poorer Southern countries of the E.U. would be cast out of the Eurozone and would have to revert to their previous currencies. Spain would return to the Peseta, Greece to the Drachma, etc.
The example of Argentina un-pegging from the U.S. Dollar should be seen as the precedent for this process. The wealthy of Argentina found their capital hammered when it was forcefully converted from the U.S. Dollar to the Peso in that process too. So the lifting of deposits, which is happening now, from the banks in Greece, Portugal and now Spain, was only to be expected. If they had their own currencies, either the fall in the value of those currencies would deter that capital flight, or the imposition of Exchange Controls would block it.
In the case of Europe, we would also expect to see Exchange Controls imposed immediately all countries that leave the Eurozone did so. This would prevent the capital hemorrhaging from the country that left the Eurozone in disgrace. The exchange rate of the exiting countries would initially fall heavily then take a long time to recover, if they managed to recover economically at all. By leaving the zone, these countries, would ensure they would suffer at least one, if not more, decades of growing poverty, much as is expected to happen with them remaining inside the Eurozone.
With the richer nations remaining in the Euro, the exchange rate of the Euro would soar at first, hammering its global trade competitiveness but attracting the world's capital. It would jump against all currencies, but most decisively against the U.S. Dollar, as its indebtedness would fall and prospects would improve.
If Germany Leaves The Eurozone
It is possible in one scene to see Germany recognizing no further advantage of remaining in the E.U. and opting to leave. This is unlikely, but technically possible. If it were to do so, there would be few really strong economies left behind, in the zone. This would be a disaster for the Euro, which would tumble against the U.S. Dollar. If the poor countries of the Southern part of the Eurozone remained in the E.U., then the Euro would remain on an ever deteriorating slope.
Germany would return to the Deutschmark and follow a similar currency path that it experienced prior to the creation of the Euro. This would mean repeated upward revaluations, usually preceded by denials of such revaluations from the Bundesbank.
In that event, the U.S. Dollar would be favored as the global reserve currency almost exclusively and would rise on foreign exchanges, despite so many reasons why it should fall. It would in fact be falling but slower than other important currencies, giving the impression of strength in weakness.
Resource producing currencies would soar. In an attempt to lower their exchange rates they would turn to lowering their interest rates in the hope of maintaining the export competitiveness of their locally manufactured goods. With resources having an international market price, outside their own currency, such nations would drive down their exchange rates, provided local inflation allowed it [As China is doing now and as was suggested by the I.M.F. recently].
The overall result would be a volatile and damaging use of currencies as part of trade wars. Should that happen, Protectionism and Exchange Controls would become commonplace, particularly in smaller economies.