“Hi David, even though it is quite a low probability event, I would be interested to hear your opinion of how a complete break-up of the Euro currency would play out. For example, being based in Ireland, would Irish bank balances be converted into a new Punt? Similarly, would bank balances in Germany be converted into a new Mark? Given that a new Punt would likely be a weak currency, would it be prudent at this point to hold cash in other currencies e.g. Singapore Dollar, Canadian Dollar, Australian Dollar? Many thanks.”

David Fuller's view

No one knows but I think a complete break-up of the Euro would be most unlikely anytime soon.  Mario Draghi has significantly lowered that risk, although GDP growth is still alarmingly low.  However, I have long said that I expected some countries to exit the single currency, eventually, just as others are still entering it. 

I believe most shared currency alliances have been temporary but I think the biggest risk for the Euro would be if Germany pulled out.  However, I cannot see that happening anytime soon as Germany has been the main exporter beneficiary and would have a stronger currency if it switched to a new Mark. 

I cannot see Ireland pulling out as it benefitted enormously from EU aid for many years and its future as a small country with a new Punt would presumably be less secure.   

The biggest long-term threat to the Euro, in my opinion, remains the regions’ Socialistic economic policies, and an undemocratic and largely unaccountable Brussels bureaucracy.  If the Euro area became more entrepreneurial, I think it would be more secure due to stronger GDP growth in the region.  Ultimately, I think it has to become a Federal single state, but I can understand why European countries, with their long histories and distinctive characteristics, have shown little interest in following this path to date.

The Euro is currently the second most important reserve currency, so I do not think it will weaken that much further.  While China wants the Yuan Renminbi to be a reserve currency capable of challenging the US Dollar, this will take a few more years.  So the Euro could remain at least the world’s third largest reserve currency for many years.

Lastly, if you wish to hold additional currencies, I would suggest that the Canadian and Australian Dollars will underperform, at least until the resources sector picks up.  It may have entered a lengthy basing stage but a significant recovery could still be several years away and dependent on stronger global GDP growth.  Meanwhile, I think the Singapore Dollar and the Swiss Franc will remain somewhat firmer as developed economy currencies.  So will the US Dollar over the longer term, although it has run ahead of itself and is temporarily overextended.