How Greece could bring capital controls back to Europe

There is a rumour swirling around that the world’s largest commercial money printer De La Rue has been commissioned to print a new Deutschmark.

This wouldn’t be that big a deal for De La Rue – it already prints 150 currencies so what’s one more. But the idea that the Germans might even be contemplating a return to their own currency is a very big deal indeed. So much so that most of those who hear this rumour dismiss it as scaremongering nonsense.

I’m not sure it is. After all, the idea that the euro might break up is hardly new (we wrote here about how Germany might revert to the DM in February 2010 for example) and so it makes sense for all sovereign governments to have a back-up plan. If Greece could afford it, I daresay they’d have asked De La Rue to print up some new Drachma for them too. Or given that not being able to afford things is no longer perceived as a barrier to governments having them, perhaps they already have. Who knows?

The only thing we do know for sure is that, while a few years ago it was “unthinkable” (John Authers in 2009) that even one country would end up out of the euro, today it seems more than possible.

But it isn’t just governments that are creating backstops for crisis. Populations are too. The business sections at the weekend reported that UK banks are fast pulling out of the wholesale money markets in Europe and the smart money left Greece long ago. If you think that there is a chance that Greece might end up out of the euro, why one earth would you hold any money on deposit in a Greek bank? Instead of taking the risk that you would end up holding a large pile of devalued Drachma II instead of the euros you thought you had, surely you would shift it into a country less likely to see a huge currency devaluation – Germany, Switzerland, or Norway perhaps – and plan to transfer it back post devaluation. Surely it can’t be long before the ordinary money follows the smart money and the Greek financial system ends up totally decapitalised?

And if the situation in Greece isn’t sorted soon, surely it makes sense to think that we will see capital flight from other peripheral nations too. If you held large cash deposits in Portugal and Spain, wouldn’t you also be thinking about shifting them somewhere a tad safer too?
This is all interesting because right now both smart and stupid money can do as it likes. There are no controls on how money can be shifted around inside or indeed outside the eurozone. If you live in Greece and you want to hold all your money in London or in France, you can do just that. And John Dizard writing in the FT points out that the European treaty seems to explicitly guarantee that you will be able to continue to do so: “ all restrictions on the movement of capital between Member States and between member states and third parties are to be prohibited” (Article 63).

However, look further down and you find that this isn’t a blanket guarantee. Instead, should it be justified “on grounds of public policy or public security,” it appears that there may be exceptions.

I bet that’s a clause being much studied in Europe at the moment given the ever-present risk of a depositor panic and consequent bank run. That raises the spectre of capital controls in Europe: the longer this crisis goes on, the more likely it is that depositors in the peripheral countries will panic. And the more they panic, the more likely they are to find that  “restrictions on the movement of capital between Member States and between member states and third parties” are no longer prohibited.

If I lived in any of the peripherals, I think I would move my money sooner rather than later. It is also worth remembering that capital controls are hardly an alien concept to the UK: we had them here until 1979.