The day the euro died

Could Europe’s currency fall? And if it did, what would happen? Sean O’Grady imagines a future in which the member nations turn back the clock

Berlin, 29 September 2013. Angela Merkel is re-elected Chancellor in an unprecedented landslide. “The girl who saved Germany” stars at a rally of supporters in the shadow of the Brandenburg Gate.

Not since the Berlin Wall came down have there been scenes like it. Merkelmania. There is no doubt about what has brought this transformation in her fortunes, those of her party, and those of Germany. After a few words of thanks, and in an unusually showy gesture, Chancellor Merkel picks out of her jacket pocket a 100 New Mark note. She waves it to the crowd. They scream approval. Everyone understands the message. Their euro nightmare is over. It had ended just over two years before.

The events of 16 September 2011, “the day the euro died”, could hardly have had a less dramatic start. For the final blow to the euro’s credibility came not from another day of turmoil or some grand summit, but from a panel of judges in the German constitutional court in Karlsruhe.

In an airless conference room decorated only with a German flag, three middle-aged German jurists executed the European single currency as casually as if they had been asked to strike down a new law on dangerous dogs. Translated from Germanand legalese, the force of the court’s ruling was plain, and unchallengeable short of recasting Germany’s constitution. Chancellor Merkel had made it clear for months she was unwilling to do so. “It is up to the judges,” she always replied to reporters’ shouted questions.

Now the judges spoke. It was “unconstitutional” for the German government to carry on bankrolling the rest of Europe: “The monetisation of extraterritorial debt instruments violates the Basic Law of the Federal Republic.” The euro was over.

Almost before the words had dropped from the judge’s lips, the plate-glass windows of Europe’s banks were being caved in, farmers were blocking motorways, and the unions were out on strike.

The court declared the verdict at 11.11am. By noon, almost every bank in the eurozone had closed its doors. Or tried to. The managements of each institution had seen such a moment coming, and they knew that there was nothing more they could do.Cash machines soon ran out of notes as terrified depositors tried to get their hands on their life savings. Like a home owner unable to keep up with his repayments, the boards of the banks simply handed the keys to their national treasuries. Itwas governments’ problem, again. Except that the governments had run out of money too.

Across the continent, the great international monetary wheel seized. The usual payments mechanism for clearing debt and credit card transactions, direct debits, standing orders and cheques began to malfunction as banks refused to honour their customers’ payments. Like the sewage systems beneath their homes, Europeans had taken the health of these for granted for decades; when they became blocked up, they created a hellish stink.

Stock markets in Paris, Frankfurt and London, and then worldwide, registered their biggest drops since the 1930s. Another deep economic slump was taken as a given. The rush to sell euros seen in the preceding weeks turned into a blind panic. The truth had finally dawned on even the most financially illiterate that the old euro was worthless, because its worth was now indeterminate. Something would be salvaged, when the euro was converted back into newly reconstituted national currencies. But for many savers in the EU, and holders of Irish, Greek, Spanish and Italian government debt and bank bonds, it was impossible to say how much. Except that it would be less.

The first window to be caved in this time was in Madrid, minutes after the headquarters of the ministry of finance had been looted. The riot police and the troops were first uncertain as to what to do, but as the flowers were jammed into their rifles they sided with the crowds. The families of the soldiers and police, after all, had suffered during the failed austerity measures of the past few years. The Spanish statewas looking shaky. Jose Luis Zapatero’s government vowed to do “whatever it takes” to maintain Spain’s unity, despite civil unrest throughout Catalonia. The Irish foreign minister, Gerry Adams, on a “solidarity” mission to Barcelona, looked uncomfortable during a photo-op inside a wrecked bank when a bomb could be heard exploding somewhere outside. The Catalans, unilaterally, declared their independence. By teatime, the prime ministers of Estonia and Portugal had resigned. Greece’s credit rating sank below Malawi’s.

But Europe’s politicians were not entirely unprepared. Since the first Greek sovereign debt crisis back in May 2010, they had begun to “think the unthinkable”. After successive bailouts in Ireland in November 2011, Portugal in December, and Spain in January 2012, the EU’s rescue fund ran out of cash when Silvio Berlusconi asked for more. Belgium was the first nation to be refused, though, on the grounds that she had no permanent government, and might not even be a nation for much longer. Like the Catalans, the Flemish separatists seized their opportunity.

Now the EU’s leaders implemented their “Plan B”. Chancellor Merkel had insisted they do so, because “Germany’s patience is exhausted”. Her voters thanked her at the polls at every election after.

First, the New Euro automatically replaced the old one, and this New Euro would be worth just 80 per cent of the value of the old one. All debts and savings would be adjusted accordingly, their values slashed.

But this was not the end of the pain for those in the weaker economies. For the New Euro was merely a bridge towards the reinstatement of the old national currencies. The New Euro was, in fact, simply an “accounting unit”, a basket of national currencies soon to be re-established fully, but for now locked into the new euro at a fixed value – but, in many cases, at a rather low value that would be devalued again before long. When these new national monies were established, on 1 January 2012, the New Euro was freely exchanged for the New Drachmas, New Punts, New Escudos, New Belgian Francs, New Pesetas and so on. The snag was that the citizens of these countries found that the bundle of notes they had would buy even less than the New Euros, and the original euros before them. For some, they had lost 50 per cent or more of their purchasing power.

Slovenia, Slovakia, Malta and the part of Cyprus not occupied by Turkey were the only territories left by 2013 where the New Euro still circulated, a financial curiosity rather than global reserve currency.

Yet in Germany, Finland, Austria, the Netherlands and a few other nations, the impoverishment was reversed. Suddenly, consumers found themselves better off when they went to spend their new Marks, Finnish Marks, Schillings and Guilder. France’s “Franc Fort 2” tried to hold its value against the New Mark, with mixed results. At “my last press conference” in May 2012, an exhausted President Sarkozy condemned the currency speculators and journalists as “idiot paedophiles”: “Gentlemen, you won’t have Sarko to kick around any more”. He had lost the presidency to Dominique Strauss-Kahn, the former head of the IMF who returned to his native France to fight for the Élysée. DSK’s slogan was: “I never believed in the euro”.

A shaken EU asked Gordon Brown to be President of Europe. Had he not, after all, masterminded the G20 summit in London in the crisis of 2008, the only successful one, and, crucially, kept sterling out of the euro? He seemed the right man for the new world: “No time for a novice,” he declared

The European public had been given a crash course in economics and the interstices of German constitutional law. The German case had been making its painful way through the machinery of the courts for many months. Bewildering legal and economic concepts were being mingled into an even more incomprehensible mess. Was the European Central Bank right to begin “monetising” the debts of the European governments in trouble – effectively printing trillions of euros to get them out of trouble. Was that in effect a breach of the Maastricht and Lisbon treaties? Did the new German proposal to make the holders of government securities and bank bonds require an EU treaty change? The euro was on trial, in every sense.

In the court of public opinion in Germany, it had lost the fight long before.Angela Merkel had been making ever more sceptical noises about the euro ever since it became plain that her government could not for ever sustain the debts run up by her neighbours, and her people wanted their Mark back. Once, in 2011, it became apparent that the German “loans” to Greece, Ireland, Portugal and Spain might never be repaid, and were in effect involuntary gifts, public support for the euro, and the European project more widely, began to collapse. One poll suggested that 83 per cent of German voters would be happy to quit the EU itself, a turn of events unfeasible even a few months ago. But the German ruling classes had also been frightened by the violence of the protests. It was called the “52 movement”, after the famous question: “Why should German taxpayers pay for Greek civil servants to retire at 52 when we have to work till we drop?”

The calculation in Chancellor Merkel’s agile mind was increasingly that the euro would have to be sacrificed to save the wider European ideal. Secret orders were issued to plan for an “orderly transition”. Operation Break-up was under way. A crude attempt by EU officials to break into the German Federal Court disguised as plumbers only added black comedy to the drama. They called it “Karlsruhegate”.

In Britain, the death throes of the euro were observed from splendid isolation. Politicians credited with keeping the pound out were given some belated thanks. Sir John Major declared himself “vindicated at last” for the “opt-out” he had negotiated almost 20 years before. A frail, wheelchair-bound Margaret Thatcher was pushed out of her Belgravia home by Carol to accept the thanks of a small crowd of eurosceptics. For was it not her original case that the euro was not just bad for Britain but bad for everyone in Europe, on economic grounds?

When the preparations were being made in the late 1980s, her aides reminded journalists too young to remember that that was what she told President Mitterrand of France and Helmut Kohl of Germany. “‘I told you so’” may not be much of a policy,” they averred on behalf of the Iron Lady, “but it does make you feel better”.

“Now we Conservatives have nothing to argue about,” declared a beaming David Cameron at Prime Minister’s Questions. The issue that had divided the Tories for a quarter of a century had been resolved. A residual source of tension with their coalition allies was also dissolved. Nick Clegg, Deputy Prime Minister, declared his party would no longer feel bound by a pledge to join a currency that no longer existed. (It was one manifesto commitment the Liberal Democrats could be forgiven for abandoning.) Less happy were Clegg’s remarks, overheard at a private dinner to celebrate his 10 years in parliament, that “Thatcher was right, actually”. It was a sentiment uncomfortably echoed across the chancelleries of Europe.

Shortly after the euro was launched in 1999, an unnamed currency trader in London had called it a “toilet currency”. In not much more than a decade, it had been flushed away.

It barely made the front pages in Delhi and Beijing.