Sunday 21 January 2018

From the brink of collapse to a semblance of stability

European Central Bank President Mario Draghi
European Central Bank President Mario Draghi

THOMAS MOLLOY Group Business Editor

"WHEN the going gets tough, you lie," quipped Jean-Claude Juncker back in May of 2011 when he was still leader of the eurozone's finance ministers and had not been thrown out by Luxembourg's electorate.

Old Jean-Claude, who was talking about the financial crisis then raging throughout Europe and threatening to break up the single currency, had a point.

There are certain times in life where the truth is rarely a good idea. Your partner's fashion sense is one. The imminent collapse of your currency is another. Nothing is more likely to become a self-fulling prophesy than a central banker announcing that he or she is contemplating a new currency because the old one is no good. One hint from officials here that they were preparing for Ireland to be kicked out of the single currency would have triggered a stampede of cash overseas.

Four separate sources have now told the Sunday Independent that high-ranking officials here spent a good deal of time thinking about what would happen if the euro were to implode.

The exact nature of their deliberations is still far from clear, but we do know there were talks at the highest level on what to do if the euro broke up. This should not surprise us; despite the denials at the time, a break-up seemed likely and failure to consider that eventuality in some depth would have been a dereliction of duty.

But we now have some understanding of what was under discussion.

The biggest concern for the Department of Finance and the Central Bank was whether the high-street banks would be able to cope. This makes sense. Most money is held electronically, so computer systems need to be robust and primed to prevent massive outflows. If the single currency had broken up, almost every cent left in bank accounts here would have left the country.

The banking statistics show that we had already endured a run on the banks in 2008 and 2009 which was promptly denied by the government of the day. But that run would have looked like a gentle jog compared to what would have happened had the euro broken up. So the Establishment's first concern was to ensure that the banks could keep money inside the country and prevent a run that would have left the country nowhere.

The second, slightly less urgent consideration, was what to do with the cash in circulation. Here, officials relied on precedent and what happened in other countries. Currency collapses are by no means unusual and the officials had plenty of examples.

Germany, now a paragon of fiscal rectitude, was a good place to start. That country has seen plenty of currencies in its unhappy history. So, too, has Russia. In the 1990s, the rouble was the common currency of 15 Soviet Republics until the break-up of that empire. Other countries such as Czechoslovakia went through an ordered break-up as the country divided into two separate states. There have been countless examples since the Roman emperor Diocletian destroyed his currency 1,600 years ago and became the first Roman emperor to voluntarily leave the throne.

The lesson from the break-up of these currencies is that it takes a long time to get things ready for a new currency. Germany was defeated in 1945 but did not introduce the Deutsche Mark to replace Hitler's currency until 1948.

The reason is that devising a new currency is not easy and cannot be rushed. A new currency involves much more than cranking up a printing press in the Central Bank's mint in Sandyford or ordering cash from De la Rue, the UK-based company that prints currency notes for dozens of countries around the world.

The experts who gathered in secret conclaves in Dublin in the second half of 2011 and the first half of 2012 were not discussing who should appear on an new Irish currency or what watermarks to use. They would have used some other time-honoured device to force people to hand in their euro notes and then perforate them or stamp them with words saying they were Irish euro.

All this made sense in that crazy period when the German and French leaders talked openly about the possibility of Greece exiting the euro and few had reason to believe that Ireland was any better.

While all this can sometimes seems like distant history, the sobering thing is that we are talking about events that happened just 24 months ago.

The difference between those crazy days and the relative calm of today is largely down to one man; European Central Bank president Mario Draghi. It was Mr Draghi's promise to do everything necessary to save the euro that has, for the moment at least, saved the euro.

When it comes to central banks, optimism is a self-fulfilling prophecy just like pessimism. That's why the odd white lie is justified.

Sunday Independent

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