We must break up the failing euro

by Martin Jacomb

Financial Times
May 23, 2012

As the struggle to preserve the euro goes on, two worrying trends are emerging. One is the migration of able and energetic young people away from the poorer eurozone countries. The other is the increasing belief that, since the euro is shaky, it is better to have your deposits in German banks than in those of the weaker countries.

Unless addressed at once, both these developments may become irreversible – but the second is the more urgent. The domestic banks of weaker eurozone members are losing deposits. The pontifications of European leaders have given the impression that Greece may revert to a new national currency. Depositors who envisage their euro deposits being converted into devalued new drachma are withdrawing them and keeping the money in euro notes (a liability of the European Central Bank) or in deposits with German banks. It amounts to a slow run on Greek banks.

This is greatly weakening the banks from which the money is withdrawn and lessens any chance of recovery in that economy. It may already be too late to alleviate the position in Greece, but this trend may develop in other weak eurozone countries.

Once a bank run starts to develop, it is already too late to take action. So now is the time to act, to ensure that a euro deposited with any sound bank will be worth the same as one with a bank domiciled in a strong country. Otherwise the banking sectors of the weaker countries may be seriously damaged.

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