Nov 292011
 

Is the Euro tumbling down to a total demise?

It still seems unthinkable – that the Euro might collapse and cease to exist.  But there is also a sense of watching an elaborately choreographed ultra-slow motion train wreck that is currently in process as the news about the Eurozone’s problems grows more dire with every passing day (by way of example, here’s a randomly selected article from today).

It is hard to know if the Euro may or may not fail, in part or in whole, and if so, what, how, or when.  Just about every political figure has such a litany of vested interests coloring whatever it is he or she says as to make all official pronouncements about the Europe’s future highly suspect and mainly wrong.

On the one hand, brinksmanship and artificially engineered crises are a common tool used by politicians the world over to beat their citizens (and their fellow politicians) into submission and to force through what would have previously been unacceptable legislation (just think of the US’ own ‘budget crises’ and regular threats of government shutdown); and goodness only knows that the European plutocrats have their heads full of new legislation they’d love to ram home at present to extinguish much of the little that remains of the sovereignty of the Euro nations.

On the other hand, if this is merely a game of brinksmanship, it is running a grave risk of getting completely out of hand, and not all the ‘players’ seem to be agreeing on the same unwritten rules.  Defaulting countries such as Greece (and Italy and Spain and Portugal and potentially others too) show little sign of changing their practices from those that created the problems in the first place to those which are now needed to solve the problems; and international bankers are showing much less enthusiasm for any type of Euro denominated bond sales at present.

The solution to the crisis seems to mainly be in the unsteady hands of unpopular French President Sarkozy, desperate to get re-elected and currently staring at a very hard to win election in 2012, and German Chancellor Angela Merkel, herself in a weaker and weaker political situation, trying to foist pro-Euro policies on her country, with its citizens – once very pro-Europe – now becoming increasingly unhappy at being forced to personally cover the costs of the irresponsibilities of other Euro nations.

Just about every world power has a vested interest either in the success or failure of the Euro, especially those countries, of which there are so many, that are delighted to see the Euro displacing the Dollar as the international currency of choice.  Accordingly, what eventually happens is likely to occur for other than obvious reasons of economic good sense.  Normal rules don’t apply and it is impossible to predict what will ultimately happen.  Whatever does occur will be counter-intuitive, at least in terms of the predictions of most of the current analysts, politicians and economists.

So there is really no ‘scientific’ or logical way to predict what (if anything) might happen, or when it may occur.

This is completely the opposite of how the Euro originally came to be.  The creation of the Euro was a nice orderly process that was well mapped out and planned.  The concept was first agreed upon back in 1992.  It was named the Euro in 1995.  On 1 January 1999 the Euro came into life as a theoretical currency unit, with the currencies of the original 14 participating countries being locked into specific exchange rates at that time, but only on 1 January 2002 did actual physical bank notes and coins appear.  Within a couple of months of that date, the notes and coins of the former national currencies were no longer valid.

But to now undo this process?  How would that work?  Some doomsday predictions have suggested that there may be an almost cataclysmic time of changeover during which ATMs will stop dispensing cash, and credit cards will no longer be accepted for (former Euro) type transactions – see for example this article written over the weekend, albeit by a gentleman who seems to have little background in international finance and economics.

We don’t think things are likely to get that serious.  But we don’t know for sure, and so it seems we all must exercise a bit of prudent forethought prior to traveling to Europe while the crisis hangs over our heads.

Which Countries Might Be Affected

Currently 17 of the European Union’s 27 member states use the Euro as their national currency.  These countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.  The currency is also used in a further five European countries (Andorra, Monaco, Montenegro, San Marino and the Vatican City) and the disputed territory of Kosovo.  Additionally, a further 175 million people worldwide use currencies which are pegged to the euro (primarily in Africa).

The euro has become the second largest reserve currency as well as the second most traded currency in the world (after the United States dollar), and with about €1 trillion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, now exceeding the former preferred world’s cash currency, the US dollar.

One of the reasons for the growing popularity of Euro denominated cash is perhaps because unlike the American limit on a maximum US$100 bank note, Euro notes are available up to €500 (about US$650) making it a more convenient way of storing illegal cash (almost a third of the total Euro cash is in the form of €500 bills).

If the Euro ‘crashes’ (whatever that means) it may have varying impacts in different countries.  One of the more likely scenarios is that one or two countries may be ejected out of the Euro-zone, while all the other countries will remain as Euro participants and with no problems occurring.

The two most at-risk countries seem to currently be Greece and Portugal.  Italy and Spain are also in difficult situations, but they may be ‘too big too fail’ and too ‘essentially European’ to be excluded from the future Euro-zone, even if the raw economic issues might make them as deserving of expulsion as Greece and Portugal.

On the other hand, we’ve also heard rumors of Italy discussing the creation of its own new sovereign currency, with the working name of the ‘New Lira’.  It would be introduced and given, initially, a 1:1 exchange rate with the regular Euro, then over time gradually (hopefully!) devalued as needed.

This type of gentle gradual departure from the Euro would be ideal and minimally disruptive.

What to Do If Traveling in Europe During these Uncertain Times

What should you do if you are likely to be traveling in Europe in the foreseeable future?  How can you protect yourself against such possible problems, or whatever lesser versions of inconvenience that might possibly eventuate?

There seems to be one obvious strategy.  Fill your pockets with good honest US dollars.  To be specific, get nearly new, unmarked, undamaged, latest design, $100 bills, and travel with them (some countries, and particularly in times of turmoil, become very specific about only accepting the latest currency designs and with the notes in nearly mint/unused condition).

We say this having observed in countries all around the world (in places ranging from A(rgentina) to Z(imbabwe) and with plenty of other countries inbetween, even such huge nations such as Russia), that whenever there has been a local currency failure, the US dollar has almost always taken on a role as a substitute national currency.

Does this strategy also argue in favor of buying that now almost completely obsoleted former travel essential – travelers checks (denominated in US currency)?  Probably not.  These days it is increasingly difficult to find normal stores that will accept travelers checks, and in a time of currency turmoil and banking problems, our guess is that merchants will be very keen to accept US cash and much less keen to accept something else which they can’t reuse and spend elsewhere themselves.  The obvious truth is that travelers checks are not cash, and in uncertain times, they may be very hard to exchange for cash.

Another popular emergency strategy that travelers have sometimes been forced to resort to is getting someone to send you money via Western Union.  In theory, the Western Union service is excellent, albeit expensive.  You contact a friend or relative back home and ask them to send money to you via Western Union, and that person takes cash (or a debit card) to a WU agent back home and gets them to wire the money to you.  Within seconds of the transaction being completed in the US, you can then claim the money at any WU agency in the country you were traveling in.

That is the theory of how Western Union transfers work.  But the reality, in a time of currency turmoil, is much less appealing.  Western Union agents are sometimes small convenience stores and other retailers, and almost always they give you the cash in local currency not in US dollars (and at a not very generous exchange rate, too).  Alternatively, they are banks, and in a time of financial crisis, the banking system is probably one of the first things to either fail or be suspended (or be crowded with angry people all demanding things the bank can’t possibly give them).  Add to that limited opening hours, and occasional computer outages, and WU is not as 100% reliable or available as one would hope.

Most of all, in a time of turmoil, the last thing you want is to get more local currency from the local Western Union agent, which may or may not have any value at all, and converted from precious US dollars at an official exchange rate that could possibly be massively less than the ‘street’ rate.

How Much Cash to Keep With You?

We suggest you keep enough cash on you to ideally be able to settle your current hotel bill, to buy several days worth of additional accommodation and food, to pay for transportation to a nearby major airport, and – if possible – a considerable sum more to cover the cost of change and upgrade fees to get on the next flight back home.

If you’re traveling on a non-European carrier and your ticket is not denominated in Euros, you’ll probably still be able to pay for this with a back-home credit card – perhaps by calling back to your travel agent or airline in your home country and getting the changes made and paid for there, but it is best not to take any chances.

And add another $500 to the amount calculated in the preceding paragraphs to cover emergency bribes and who knows what else might be needed to help you speedily leave the Eurozone.

How to Pay Formerly Euro Denominated Costs with US Dollars

Maybe, if the Euro does cease to exist, national governments will set official formulas in place for what value can be assigned to existing Euro currency, and how to convert from old prices and invoices to new currency amounts.  And, equally maybe, it is possible that any official pronouncements may be very different to what really truly happens on the street.

Keep an eye on the USD/EUR exchange rate, and if the Euro suddenly crashes, the fairest thing would be to offer to pay in US dollars based on an exchange rate close to the time the Euro failed.

Alternatively, you could offer to pay a lesser amount in US currency because quite possibly there may be a period of time while things are messy where dollars become worth a great deal more than their theoretical value, simply because they present as a fair neutral universal currency that will survive whatever wild gyrations in values might occur to the Euro and the underlying individual national currencies.

Suggestions for Travelers from Other Countries (ie Not the USA)

Apologies for this very US-centric set of recommendations.  However, our recommendation to you, if you are not from the US, is almost exactly the same as it is for Americans – travel with US cash.

The only other two currencies of note to keep in your wallet might be the Swiss Franc and the British Pound – both are more or less understood and respected in the Eurozone.

But if you’re traveling from anywhere else – Canada, Australia, Asia, wherever – your home currency will be little appreciated and of little use if normal financial systems break down.

Most Important of All

If the Euro fails in anything other than a very graceful and controlled manner, we urge you to cut short your travels and urgently get out of the Euro zone.  Ideally, return back home, but failing that, at least get to a country with its own sovereign currency.

Society these days lives on the edge of a perilous precipice.  ‘Just in time’ inventories in supermarkets, gas stations, and just about everywhere else means that any supply disruptions will quickly result in hard shortages in cities of some of life’s essential ingredients.  Add an increasingly unsettled social factor that is restlessly stirring, and as soon as supply problems start happening, look out for social unrest, rioting, and potentially spiraling chaos such as to make the rioting in peaceful pleasant England earlier this year (or more recently in Greece and Italy) seem like Sunday school picnics.

One of the important aspects of this is that the transition from ‘plenty of food (or gas or whatever)’ to ‘no food/gas/whatever anywhere’ could occur very quickly, and as we’ve seen in the last year or so, ‘flash mobs’ and interconnected rioting all across a country, fuelled by ‘social media’ coordination, can also occur very quickly indeed.

If there’s any danger of social disruption, you are best advised to leave quickly rather than wait, because the transition from ‘safe and sane and sensible’ to its opposite could occur, quite literally, overnight.

Will Your Government’s Embassy Help

Most countries have some type of ‘distressed traveler’ program where in some form or another they’ll help their citizens in times of emergency.

But these support resources are designed to help maybe one or two people a week.  If the probably thousands or tens of thousands of citizens traveling in a European country all rushed to the US Embassy for help simultaneously (or smaller numbers for other embassies) the support capabilities would be extremely overwhelmed and would totally fail.

So don’t expect that, if things go wrong, your government’s embassy will be there to help you.

Summary

We don’t want to sound alarmist.  We ourselves believe the Euro is either likely to survive or to reasonably gracefully be transitioned away from and replaced with other currencies, in some or all of the current Euro-zone countries.

But the minimal cost and inconvenience involved in packing a dozen or more nice new $100 bills into your wallet before traveling to Europe during this time of uncertainty is probably a wise precaution; and being aware that if problems do occur, your best strategy is ‘to get the hell out of Dodge’ in double quick time is also good to keep in mind.

Leave a Reply