Can the breaking up of the Euro be achieved in an orderly way

October 14, 2015

Guest blog post by Richard van Tongeren, Interim-manager.

The last couple of years there is a lot to do about the survival of the EURO in it’s present form. However, I haven’t seen any article or discussion about the IT or organizational problems if the EURO would collapse.

What are the challenges if we’ll have to go back to different currencies in the 19 countries that are making up the Eurozone or to a North – and South Euro.

This article tries to give some important consequences and questions which have to be answered if we’ll dismantle the EURO.

Conversion to the EURO.

On december 31, 1998 the exchange rates of the 12 currencies to the EURO were established, one day before the stock exchanges started to trade in EURO’s. On january 1, 2002 everything else like banknotes, bank accounts, price lists etc. were converted to the EURO.

The timespan between 1998 and the actual conversion in 2002 gave us 3 years time for the preparations to change the IT systems, convert the databases and adjust product prices etc.

As a project-manager at a big Insurance company I was responsible for the Euro Conversion project. It was a big project and a lot of people were involved.

The conversion from the EURO is much more complicated then the conversion to the Euro.

The biggest challenges and questions are;

1. The timespan between the announcement to end the euro and convert it into 19 currencies or to create a north/south euro, must be extremely short. This, to prevent gigantic capital transfers. When the conversion takes place people rather have their euro’s in banks in a strong then a weak economic country in order to get Dutch guilders or German Marks for their euro’s instead of Greek Drachma’s or Spanish Peseta’s.

2. In 1998 they took the exchange rates of the 12 currencies on the FX Exchanges towards the EURO to decide the conversion rate. When going from the euro to different currencies there are no benchmarks or comparisons to decide what the value of the new currencies between each other is.
Therefore the FX exchanges will be the Judge on the First day of trading with 19 currencies instead of the Euro. This could give a very wild and volatile market.

3. Central Banks all over the World have EURO reserves. How are these going to be converted? Is China getting a certain amount in each of the 19 currencies for their euro’s and if so, how many guilders, escudo’s, lires, peseta’s are they going to get for their billions of Euro’s?

4. The best way to avoid a lot of work, which probably would take years, is to keep the amounts in each country the same. With other words, € 1 becomes FL. 1 in The Netherlands, DM 1 in Germany, 1 Peseta in Spain etc. This way nobody has to calculate how many Dutch Guilders is worth 1 Euro, so there is no need for a conversion and to change productprices and IT systems etc.The only thing that has to be changed is the currency sign from € into fl, dm,likei t was before the Euro.The problem remains for the administration of the multinationals. Their bookkeeping is in euro’s and has to be changed in 19 different currencies. With a very short timespan, (see point 1) that’s impossible.

5. All the deals within the Eurozone, like factory orders, booked vacations, bankguarantees, before the conversion to other currencies are made in euro’s. What’s going to happen after the conversion when the currency rates on the exchanges are going wild. For instance, a company in The Netherlands places an order of € 20 million in Portugal. Just before the delivery of the order the euro is converted. Suppose the value of the Dutch guilder rises 20% against the Portuguese escudo. Who is taking the loss and who is taking the profit.

Conclusion.

Multinationals and banks which work crossborder through the Eurozone will have to adjust there administrations in a very short time period due to the risk of capital flows. Companies and individuals who have placed orders or vacations etc don’t know what to expect after the conversion.

If the expectations of a Greek exit were 6-12 months of chaos in Greece, what can we expect if
19 countries, concerning 340 million people, will get a new currency?

If this conversion is completed there is no way back.