Should investors dump the Deutschmark?
- UBS does not believe that the euro will break apart. However if the euro ceases to exist, holding cash in Germany is unlikely to be the safe haven some investors believe.
- Every monetary union breakup in the twentieth century was preceded by significant capital movement (monetary union breakups are driven by bank runs, not politicians). Money moved into the economy that investors believed to be strongest. In the case of a euro breakup that would be Germany.
- If after such inflows all the euros in Germany were converted into Deutschmarks, they would represent claims on German goods and services (that is what money is). Claims on German output would surge but German output would be unchanged. The imbalance would create significant inflation.
- If Germany were unwilling to accept inflation, it would have to reduce the amount of Deutschmarks in the economy. One way would be to discriminate between domestic and foreign holders of cash; domestic holders of euros might get one Deutschmark for one euro, but foreigners one Deutschmark for three euros, for instance. Exactly that happened with German monetary reunification in 1990. This means Deutschmark cash is not a certain store of value in the event of euro disintegration.