Why haven’t the cataclysmic bank runs that would herald the end of the Eurozone already started?
My understanding of the apocalyptic dangers of undoing the Euro is that, were a country to announces it intended to leave the Euro, everyone would anticipate devaluation. If Italy said, “Next month, all your bank accounts will be in Lire instead of Euros,” people would load up their cars with cash and deposit it in Geneva or Munich where 100€ will still be 100€ and not L100 worth something less. So, as soon as you start the switch, all your financial institutions instantly fail. (You also have the headache of printing the new currency, retooling all your vending machines, handling the distribution logistics, but that’s another story.)
But people seem convinced that Greece will default, and that Portugal and Ireland may need to as well. Italy and Spain are under speculative attack.
Krugman composes a Venn diagram:
So, what’s keeping everyone from moving their money out of the periphery? What’s keeping those banks going right now? Even if you think there’s only. say, a 10% chance of Italy leaving the Eurozone, and that even if it did leave the devaluation couldn’t possibly be worse than 50%, it seems a straightforward choice:
- leaving your money where it is, you expect to lose 5%
- putting it in your car and moving it costs you a a few days of tourism and some petrol
Argentina, when it unpegged its currency, required that dollars deposited in Argentina would only be redeemable in pesos. You had to have taken your money to New York, you couldn’t just walk it to the Citibank office down the street. Still, there must be dozens of ways to work around this with a telephone call or two – by moving your bank account into T-bills and then selling those T-bills in New York, or asset arbitrage between accounts in Rome and corresponding accounts in London.
This isn’t happening, so clearly my model is faulty. What have I overlooked?
So, why hasn’t the run started? What am I missing?