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Will the Euro be able to survive bank runs in countries like Ireland and Portugal?
If Euros in banks in different countries are not of equal value (e.g. euros in Ireland are not as strong as euros in Germany), then we can expect to see declining private sector deposits in the weaker countries. Will this cause a run on banks in places like Ireland and Portugal? Will the euro survive this capital flight?
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3 Answers
I fail to see how the bank run affects the currency rather than just the bank and the economy of the country where the bank is located. Banks fail in this country all the time without any effect on the currency.
The bigger issue is that the individual countries of the EU have given up the right to conduct monitary policy in their country by adopting the Euro. Therefore they are unable to raise or lower interest rates such as the US does to encourage borrowing and economic growth. This can make the unemployment rate higher in a country that needs stimulation from the currency, but other strong countries such as France, Germany or Italy do not see the need for stimulation and therefore keep their rates higher (and attract more currency for the better and safer return). A country can try to employ fiscal policy and spend more government funds, but the EU has limits on the amount of deficit spending that again hurts the poor country's economy.
Despite the above, the Euro and European integration have been a good thing. Since WWI, Europe has been mostly at peace and prosperous. The issues have resulted from taking in weaker members who still can run their economy into the ground through local actions and there also can be negative reaction from capital flows out of one country into another. The EU central government does not trump individual governments in noneconomic areas. So this is a hard to govern situation. The stronger countries have been very helpful through this crisis to support the weaker members who sometimes seem less than appreciative.
The Euro is a single value denomination across all the member countries. IT can survive "bank run's", but it will change its valuation vis a vis other currencies, such as Pounds Sterling and US Dollar.
This will ultimately have a negative effect on the Euro communities economy en-mass.
Time will tell...
I'm not sure this type of imbalance alone would cause a run on banks. Though a dollar buys significantly more in Kansas City than it does in Manhattan one doesn't really gain any strategic or tactical advantage simply by banking in NY because there is no currency exchange between states. The benefit comes in actual purchasing regardless of where you keep your money.
For most individuals, I don't see this being an issue. However, the member states that produce goods for cheaper will likely see an increase in demand for their goods and population increases as people come to take advantage of the lower cost of living. Very similar to the way places like Kansas City are currently growing by attracting workers and businesses because of the comparatively lower costs of labor and living.
In theory, this should balance out the over time just as it does (more or less) within the states. However, in reality, there is still state sovereignty which complicates things considerably but in order for there to be a run on banks, I think there would have to at least be a currency exchange from one place to another which in turn requires distinct currency.
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