The Four Traits Of Monetary Union Collapse

Tyler Durden's picture

There are four traits that UBS identified as common trends around the breakup of a monetary union. So has Cyprus (as is tirelessly pointed out, only 0.2% of the Euro area measured by GDP) set a course for the Euro’s destruction? Indeed, with Cyprus having checked the first three items on that list, while it has not left the Euro (yet), UBS concludes, "it may well be occupying a seat very close to the exit."


Via UBS: Is Cyprus Still In The Euro?

The four traits are:

  • Monetary union break up is preceded by capital flight from perceived weak from perceived strong parts of the union
  • Monetary union break up has tended to be regarded by governments as an opportunity for seizing cash or other assets held by citizens
  • Capital controls tend to be imposed early in the break up, and foreigners’ asset holdings are often discriminated against
  • Break up of a monetary union is normally associated with civil unrest and authoritarian government in at least some part of the former monetary union.

Eighty years of historical repetition

Let us get our worst case scenario out of the way. Cyprus has not left the Euro yet. It may well be occupying a seat very close to the exit, but in spite of having met the majority of the conditions of past monetary union collapses, it has not actually pushed through the door into the outside world. Instead, Cyprus – and perhaps the wider Euro area – can be thought of as occupying a position not too dissimilar to that of the United States in 1932/33, when the US monetary union effectively ceased to exist and then reformed.

The characteristics of monetary union failure are common to nearly all monetary union breakups, but they are not sufficient conditions of themselves. The US monetary union in 1932 experienced the first three conditions associated with a breakup, in that various states legislated bank holidays, limited deposit withdrawals, and restricted the transfer of funds out of state (the last point was generally accomplished by closing the banks). However, it should be noted that unlike Cyprus the movement of physical cash across state boundaries, assuming one had any to start with, was not prohibited in the US.

This process of bank holidays had followed on from an earlier episode of capital flight. Anticipating problems, financially savvy citizens of several states began to move their money into New York banks, as these were perceived as being stronger entities.

However, most economists would consider the US monetary union as functioning until January 1933. The union was certainly strained, and a dollar cash in New York had a different value from a dollar cash in Michigan (for example), but the central part of the monetary union was still functioning. What caused the monetary union to cease was the refusal, in January 1933, of the Federal Reserve Bank in Chicago to discount the bills of the Federal Reserve Bank in New York. One part of the central bank refusing to lend money to another part of the central bank signals pretty much the end of the monetary union.

The current situation in the Euro area has not reached that point, indeed is the antithesis of that. The European Central Bank has clearly been prepared to provide funds to the Cypriot central bank, and the Target 2 system of transfers between central banks is still operational. This is what enables us to say that the Euro remains intact as a monetary union. Should either of those situations change then Cyprus would cease to be a part of the Euro in any practical economic sense.

This does not mean that the Euro has nothing to learn from the events in the United States eighty years ago. The US monetary union breakup was unusual in that it also led to a successful reformation of the monetary union. The means by which this was achieved were twofold: first, establishing confidence in the banking system; second, by creating a fiscal union. The second of these options is not imminent in the Euro (and took several years in the Unites States). However, the first of these options is not only available it is actually under discussion with the concept of a banking union (which would entail a credible lender of last resort).

The idea is something that ECB President Draghi has alluded to repeatedly. In a monetary union there should be differentiation of borrowers by credit quality, of course, but there should not be differentiation by geography alone. The theoretical concept of the Euro sovereign ceiling being AAA regardless of the nationality of that borrower reflects that belief (in reality the theory has not survived the crisis). The reality of the disparate banking systems of the Euro area is that there is geographic discrimination, and the monetary conditions faced by a borrower in Spain are not the same as those faced by a borrower in the Netherlands, and neither faces the monetary conditions faced by anyone in Cyprus. Integrating the banking system of the Euro area, and providing a degree of common assurance across the Eurozone banks, or a subsection of “federal” Eurozone banks, must now be considered an essential next step on the path to Euro survival, in our view.




Events in Cyprus have caused those of us that think the Euro survives to at least question the odds of its survival. The cost of break up and the near certainty of contagion should hold the structure together. But Cyprus does serve as an opportunity to catalyse further necessary reforms with the right leadership. Let us hope the Euro can find its President Roosevelt, and not a President Hoover.

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Debugas's picture

to put it short - the troika is trying to preserve bankrupt financial system of EU and will not stop at anything to save it

Buckaroo Banzai's picture

“We shall have World Government, whether or not we like it. The only question is whether World Government will be achieved by conquest or consent.” -- James Paul Warburg, February 17, 1950, before the US Senate.

JLee2027's picture

"""James Paul Warburg (August 18, 1896 – June 3, 1969) was a German-born American banker"""

Well that explained it. Heil! 

Tijuana Donkey Show's picture

HeilBank, it's everywhere you don't want it to be. Free mushache with any account cut.

notbot's picture

Speaking of currency collapses, has it occured to anyone else that one reason (among many) that Gold/Silver are so weak lately is b/c Bitcoin is gaining traction and could make them obsolete as currencies?

If I understand Bitcoin correctly (thank you Tyler), it is impossible to counterfeit. It is more portable than gold, much easier to store, has a finite limit to amount that will ever be in circulation, and has no counterparty risk (gold does if you store it outside your home).

I'd love for this to be the real deal. I'm skeptical, but perhaps after a "great reset" bitcoins will be more practical than gold.


tickertapeguide's picture


combibars, the bit coin for the apocalypse.  one mean solar flare could knock out your holdings in bit coin.... just sayn.

Non Passaran's picture

It'm sick and tired of these "arguments".
What's more likely, destructive solar radiation that can damage bitcoin or nuclear radiation that can irradiate one's PM's?
I'd say the former seems less likely.
And in any case no one has said people should convert PM's into Bitcoin.

Non Passaran's picture

They're good for what they're good for.
That has nothing to do with PM's.
It's a small market.
It's incredible how 1BTC is about as scarce as 4 oz of silver. WTF...
I'd say silver is cheap.

JLee2027's picture

Bitcoin is for fools.

JimBowie1958's picture

Yeah, and if God had meant us to fly he would have given us wings?

And according to many back in the early 19th century mankind was not meant to travel at the break-neck speed of over 30 miles per hour!

And of course, transmitting moving pictures over a wire was clearly impossible, and this applied to voice transmissions as well.

I can understand that you dont trust new technology. I am a bit of a stick in the mud mysefl.

But to assume the arrogance of telling people they are fools because they do not agree with me is something i can no longer fathom, if I ever really could.

NoDebt's picture

Thoughts?  Yes.

Advice?  Not so much.

First let me ask, have you actually tried it?  Because I have.  Just last month, actually.  Posted about it here, openly.  Said what I was going to do and did it.  Yes, I rode the wave from $48 to $115.  Super duper.

If you think that it's shortcomings (which are many) are about false scarcity or about the strength of the encryption (which is extremely strong) or about the danger of solar flares taking down the whole internet (which I won't dignify with a comment) or any of that happy horseshit, you're missing the REAL risk. 

BitCoin does not work without EXCHANGES.  It does not do you any good unless you can EXCHANGE IT.  Right now, handles ~80% of all BitCoin exchanges.  They are located in Japan.  If you shut them down, you put a serious hurt on BitCoin.  Sure, it can migrate somewhere else (many places else) but like Napster got shut down, so you could shut down all the major BitCoin exchanges.  The only ones left would have to be in places like Afghanistan or something- and are you willing to exchange your BitCoins in and out of other currencies relying on an Afghan-located exhange to give you a fair shake in that transaction (or ever give you your money back if you ask for it)?

BitCoin only exists and works because there is western-style rule-of-law ALLOWING it to exist.  That can be revoked.  If BitCoin gets big enough and threatens a major currency it must assuredly WILL be revoked.  And that's the ball game.

Have fun with it while it lasts.

dark pools of soros's picture

not really..  anyone with an Avalon right now can be their own local exchange for cash in hand, and bitcoins sent to your wallet

they can do it on craigslist

notbot's picture

Thanks, NoDebt...that's what I was looking for.  Ultimately, I think BitCoin gets shut down b/c it's too big a risk for govts.  Wish it were otherwise, love the concept.  It's prob a donut waiting to happen.  That's why I said it would only happen after a great reset.  Until then, govt can put the smack down on it if it grows too much.

JimBowie1958's picture

Shutting down Bitcoin would require the government to unilaterally seize every Bitcoin node that exists across the globe simultaneously.

If they dont, node admins can very quickly back up their systems to files that can be moved and the network restarted underground.

It isnt going to happen. By the time enough people in the government would have the ability to shut Bitcoin down, too many of them will have wealth stored in Bitcoin for it to actually workout.

notbot's picture

Oh, I agree with that. But what govts can do is pass a law that makes it illegal for any U.S.-based business to accept bitcoins since they are used ostensibly as a mechanism for tax evasion (both sales tax and income tax).


You'd only need a few major developed mkt countries to do the same thing and bitcoins would lose value very quickly just b/c you can't actually use them for anything that you really want to buy.  


The network would still be up, bitcoins would still be scarce, but just not liquid back into USD or very useful for everyday trade.

JimBowie1958's picture

True if the law reduces legal demand for any item it will lose some of its value.

But the thing is, as long as criminals find use for e-currencies they will persist in having value.


notbot's picture

You make a good point, I agree with that.

stacking12321's picture

as far as bitcoin being the "real deal", life is a journey, not a destination.

bitcoin had some very good advantages, as well as some shortcomings.

but, i expect it is an important step in the evolution of currency, and will either evolve, or be replaced by one of its offspring.

important advantages:

  • not centralized / not under any govt's control
  • not trackable so long as you take proper precautions
  • open source / the code is right there for everyone to see

disadvantages needing to be addressed:

  • not backed by anything tangible such as gold (arguably, bitcoins are mathematical solutions to problems, generated by mining, so a bitcoin represents an investment in the electricity used while mining)
  • open source means it can be copied, you can create the bitcoin 2.0 network without too much work, with 21 million more bitcoins added to circulation


JimBowie1958's picture

You dont seem to appreciate the computational power right now that backs up the Bitcoin system. Maybe the NSA could do it, but I doubt that too.

People have tried to fork Bitcoin and they have been stopped every time.

Hell, no one has forked Litecoin and it has one thousandth the computational power behind Bitcoin.

What is 'behind' Bitcoin and Litecoin is pure computaional power, the top security of any currency and the ability of people to 'mine' it for themselves.

Bitcoin is a prefered commodity used by many crimninal groups today, so it has plenty of demand to last it.

gratefultraveller's picture

Why look at the two sides of the coin separately, if you can look at the big picture?

From "Das schwarze Reich" (The Black Empire), E.R. Carmin:

1917... "The head of the German Secret Service was a brother of the american banker and Vice President of the Federal Reserve Board, Paul Warburg. Max Warburg, living in Berlin and cooperating in the financial affairs of the Kaiserreich made available for Lenin... 6 million Dollars in gold"

Without that gold the Bolshevik revolution would never have succeeded, and Russia would not have turned communist.

gratefultraveller's picture

Antony Sutton on the BIS - the central bank of central banks - and it's role in WWII:

The fact that the Bank possessed a trul y international staff did, of course, present a highly anomalous situation in time of war. An American President was transacting the daily business of the Bank through a French General Manager, who had a German A ssistant General Manager, while the Secretary- General was an Italian subject. Other nationals occupied other posts. These men were, of course, in daily personal co ntact with each other. Except for Mr. McKittrick [see infra] theft were of course situated permanently in Switzerland during this period and were not supposed to be subject to orders of their government at any time. Ho wever, the directors of the Bank remained, of course, in their respective countries and had no direct contact with the personnel of the Bank. It is alleged, howev er, that H. Schacht , president of the Reichsbank, kept a personal representati ve in Basle during most of this time.


Ropingdown's picture

I'm no Francis:  During the 1stWW all the large int'l Jewish organizations were pro-Germany. Surprise.  Enabling Lenin to go back and cause chaos was, from their point of view, natural.  They didn't comprehend the nature of the Leninist beast.

Kirk2NCC1701's picture

What, no comment from Francis, regarding Warburg's "tribe" connection?  ;-)

The bankrupt Western CB's and their crypto-aristocratic bosses would love to run the world via their fiat confetti money and financial 'paperware', but the fact is that BRIC + the rest of the world won't stand for it.  These CB's are totally desperate to keep their global Ponzi going -- but will fail on the rocks of physical reality.

bank guy in Brussels's picture


« Countless people will hate the new world order ... and will die protesting against it. »

- H. G. Wells, 'The New World Order' (1939)

The Alarmist's picture

Let's see ... 100's all serial marked with X, 50's all X's, 20's all X's ... guess I don't care if Cyprus is still in the Euro. Or do I?

Non Passaran's picture

Chump change vs what's already been sunk

Whalley World's picture

They say that breakin up is hard to do - Neil Sedaka

krispkritter's picture

 '...there must be 50 ways to leave your Banker...' Ron Paul Simon 

bank guy in Brussels's picture

Leavin' the euro ... all it takes is courage and common sense

Article above is praying

« Let us hope the Euro can find its President Roosevelt ... »

That's wrong, totally wrong

What the euro needs, in the Mediterranean countries, is Moses or Simón Bolívar or Thomas Paine

"Let my people GO!"

debtor of last resort's picture

Let us hope the eurozone will find it's 'president' hanging. Instead of an unelected techno pres as the leader of the debt heard.

Charles Wilson's picture

"Let us hope the Euro can find its President Roosevelt, and not a President Hoover."

If that's what we are left with, we are doomed.  Roosevelt was a Thief's Thief, a Statist that instituted what Wilson could not get accomplished.

I hope that you sincerely do not believe what you wrote.  Perhaps a rhetorical flourish to end an essay.  FDR marked the end of the American Experiment and the DISASTER that we now face finds its roots with FDR.




The Alarmist's picture

I'd say they are somewhere around Millard Fillmore in their development ....

Bay of Pigs's picture

FDR was a Bankster. He was certainly no lover of Freedom and Liberty or the US Constitution. 

jon dough's picture


Here's Garrett telling how it went down in "The Revolution Was"

Kirk2NCC1701's picture

FDR was a patrician aristocrat with a liberal bent that was purposefully 'contrarian' to his aristocratic peers.

Sudden Debt's picture

so sad... we where so happy... one big happy family....



The Alarmist's picture

Joachim: They're still running with shields down. 
Khan: Of course! We are one big, happy fleet! 

Beam Me Up Scotty's picture

It was the best of times, it was the worst of times. Message Spock?

NoDebt's picture

None that I am aware of, Captain.  Other than, of course, "happy birthday."

Beam Me Up Scotty's picture

"Sauce for the Goose, Mr. Saavick.  The odds will be even..."

NoDebt's picture

"Two minutes to nebular penetration.  Reliant..... is closing."

I could do this shit half of forever.  God, I'm such a geek.  Ooo, how about this one:

"ICAAAAAAAAAAAHN!".  Nope, not Kirk.  Bill Ackman.

Bicycle Repairman's picture

"Just give me the Xenite, you ugly, evil smelling two-headed Reamulan freak."

Kirk2NCC1701's picture

The worst is yet to come.  One to beam up.

disabledvet's picture

there already is a "euro state." this was not true in the USA in the 1930's. ironically one could argue "it's not true today either." monetizing the debt funds neither the Agency nor the "money" (via an economic recovery.) the USA appears to me to be "just happening to have an economic recovery"...and that's about it. in Europe i think to argue there isn't a "financing problem" of the first order is as patently ridiculous as it is false. this is not some "esoteric concern" either. what is presented here "presupposes a solution." i would argue it presupposes a DEVALUATION and THEN a "solution." of course..."the Swiss are pounding the table about how undervalued their Franc is" so why would i think that...

chump666's picture

LOL how you going to trade this UBS?

ebworthen's picture

Don't forget about FDR trying to steal citizen's Gold:

"The order criminalized the possession of monetary gold by any individual, partnership, association or corporation."

This time around, they will criminalize the possession of Gold by individuals, and let the Corporations keep it (Corporations are individuals as far as the Supine Court is concerned - but an exemption here will be made no doubt).

graspAU's picture

He also stole silver in 1934 (he stole a lot of good assets with his programs). Not by the same method as gold, he called it in to be coined and charged hefty fees for coining, confiscating a nice part of your metal. He wrote in his personal letters that he thought gold should be owned by the government and the people should be left with silver. He also thought he was going through a bigger battle than the one Andrew Jackson had with the 2nd Bank of the United States:

“The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson…The country is going through a repetition of Jackson's fight with the Bank of the United States--only on a far bigger and broader basis. “
-Letter to Col. Edward Mandell House (21 November 1933); as quoted in F.D.R.: His Personal Letters, 1928-1945, edited by Elliott Roosevelt (New York: Duell, Sloan and Pearce, 1950), pg. 373.



DavidC's picture

Here in the UK (so not as 'at-risk', YET) my parents have already removed cash from their account to have 'readies'. My Mother was talking to a friend of hers today and mentioned it, her friend has already been considering the same actions.

If that's in the UK, I'll be mightily surprised if it isn't already happening in the Eurozone.

I won't go into details, but I'm impressed by the astuteness and awareness of my parents, both of whom left school at a young age because they had to. That MUST be where I got my brains from!


soopy's picture

Apocalypse bitchez

Ban KKiller's picture

Called my bank today to tell them to up my limit of daily withdrawals. 

Called my ladies and told them to expect more deposits.