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The end of EMU: How Germany might leave

Julian D. A. Wiseman

Abstract: A country in the eurozone can, without being in breach of the Maastricht Treaty, create a new central bank controlling the monetary policy of a new currency. This loophole in the Maastricht Treaty is not widely known.

Publication history: only here. Usual disclaimer and copyright terms apply.

An earlier essay (The end of EMU: legal ramifications), discussed the non-recoverability of the eurozone’s members’ former national currencies. It concluded that even if a country (or all countries) left EMU, euro debts and euro assets would remain in euro.

This essay discusses in more detail the mechanism by which a leaving country would introduce a new currency. This essay has been informed by many conversations with and a paper*1 by William Porter of LEDR and CSFB, and also by a dissertation on currency boards, dated 1992, by Kurt A. Schuler, then of George Mason University. Of course, the errors and opinions herein are those of this author, Julian Wiseman.

So for the purposes of this essay we assume that Germany has had enough. For whatever combination of political and economic reasons (in so far as they are distinct), Germany wants to introduce a new currency under the control of the German authorities.

One of Germany’s options is what could be labelled the ‘1948’ strategy. All German citizens (or all those who satisfy some residency condition) would be issued with a thousand Neue Deutschmarks (NDM). Legislation would be enacted that:

There are variations on this theme. The ‘1990’ variation might allow some euros to be converted into the Neue Marks, perhaps with an upper limit per eligible person. Unfortunately, this particular variation would suffer from ‘leakage’. Italian holders of euro, unable to exchange their euros with the German state themselves, would buy goods from or lend money to Germans, and the Germans would then exchange the old euro. In practice, all Germans would exchange all that they were allowed to, so there might be little practical difference between the 1948 and 1990 techniques.

Before remarking on why the German state might be reluctant to try such a thing, some additional notes are appropriate.

What would determine the worth of the Neue Mark? One of the most important influences is the number issued. If ten times as many were issued, then all other things being equal, each would be worth one tenth as much.

The taxation regime is also pertinent. Some authors, especially Warren B Mosler in his article on Soft Currency Economics, argue that the primary purpose of taxation is to give a purpose and hence a value to money. Without going that far, it is clear that if the German state imposes a tax on cigarettes of 10 million new marks, then the new mark may well have to be worth less than if the tax were 10 new marks.

That said, there is a problem with the 1948 and 1990 strategies. The problem is that they would be in manifest breach of Article 106 (ex Article 105a) of the Treaty establishing the European Community (the Maastricht Treaty)*2.

1. The ECB shall have the exclusive right to authorize the issue of bank notes within the Community. The ECB and the national central banks may issue such notes. The bank notes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community. *3 *4

2. Member States may issue coins subject to approval by the ECB of the volume of the issue. The Council may, acting in accordance with the procedure referred to in Article 189c and after consulting the ECB, adopt measures to harmonize the denominations and technical specifications of all coins intended for circulation to the extent necessary to permit their smooth circulation within the Community.

So Germany cannot legally issue banknotes except with the permission of the European Central Bank, permission unlikely to be forthcoming. Germany could walk out on the Treaty, but in practice this would mean walking out on the whole European Union. That may well be more than a German politician could carry off.

What is not widely known is that Germany could introduce an entire new currency, in an entirely orderly manner, without breaching the Maastricht Treaty.

Of course, once Germany took the initial steps towards sneaking a new currency into existence, its negotiating position within the community would be hugely advanced. Other eurozone members, aware that a German exit would destroy the value of the euro, would be willing to make significant concessions to keep Germany inside. Such game-theoretic jockeying increases the chance that a German politician would want to threaten such a trick.

How would this work?

This would not be in breach of the Maastricht Treaty: the President of the Bundesbank (an entirely different institution to the Deutsche Zentralbank) would continue to attend and vote in ECB meetings, and Germany’s place in the various EU institutions would continue, unruffled by the allegedly-commercial transactions into which the recently-formed DZB was entering. Germany could and would ‘plead innocent’.

(Alan James, another CSFB colleague, suggests that Germany could get this started a little more discreetly by using its currently-existing government debt management agency, rather than a provocatively-named Deutsche Zentralbank.)

Whatever it is called, it is really a new central bank issuing its own currency and in control of its own monetary policy. But because this currency isn’t legal tender, people would not be compelled to use it. Would they use it voluntarily?

And, were Germany to announce the creation of the DZB, the euro’s value in the foreign-exchange markets would plummet. This would make the success of the DZB self-fulfilling: if it were tried, it would work.

One can imagine a situation in which Germany hints that it might, regrettably, feel that this was its best choice. What would the other eurozone countries do? If individual countries (such as Germany) have by this stage lost their veto on European tax laws, then the non-German eurozone members might gang together to impose some form of punitive tax on the DZB. However, if enough of the non-German member countries were unable or unwilling to do this, then all of them would have to pay very careful attention to whatever else Germany might request. So Germany would not be able to choose any price, but may well be able to choose a high price.

Julian D. A. Wiseman, October 2000


*1 William Porter’s paper ‘Leaving EMU’ is nearly impossible dated 12th September 2000, is not available on the world-wide web as of October 2000. A copy of it, or of something similar, may later become available at LEDR. Meanwhile, it is available to clients of CSFB, and is available from within CSFB’s firewall here or here.

*2 A PDF copy of the Treaty (with the relevant Article on digital page 51 which is paper page 83) can be reached via, and there is a text copy at Note that the wording of the Article differs slightly between the two, the latter appearing to omit an “of”. It might be that this preposition was missing in the original and later added, and it might be that its omission is in error.

*3 An ambiguity is introduced by the word “such” in the phrase “The bank notes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community”. This phrase appears to mean that “The bank notes issued by the ECB and the national central banks shall be the only notes issued by the ECB and the national central banks to have the status of legal tender within the Community”. If it does mean this, then other bank notes issued by entities other than the ECB and the NCBs can be legal tender. If it doesn’t mean this, then what does the word “such” bring to this sentence? The interpretation would have to rely on the versions of the Treaty in other languages: the author would be pleased to hear from someone with both the legal and the linguistic expertise.

*4 It is also worth comparing with clause XI of the Bank Charter Act 1844, which gave the Bank of England a monopoly on note issue:

… it shall not be lawful for any Banker to draw, accept, make or issue in England or Wales, any Bill of Exchange or Promissory Note or engagement for the payment of Money payable to the Bearer on Demand …

Had the Treaty been based on this wording, the above plan would fail.

As an example of an older controversy about the wording of banking monopolies, the following quotations are taken from pages 307 and 309 of A History Of Money, by Glyn Davies:

By a second [Bank] Act, passed on 26 May 1826, the Bank of England’s century-old monopoly was partly broken, by allowing joint-stock banks with note-issuing powers to be set up outside a radius of sixty-five miles of the centre of London. In return, the Bank of England was explicitly authorised to set up branches, or ‘agencies’, anywhere in England and Wales.

[1832] … Thomas Joplin, a Newcastle timber merchant, … was actively promoting a number of [new joint-stock banks], for fittingly enough, he had been one of the most powerful forces in bringing about the modification of the Bank of England’s monopoly. … In the mean time he took his quarrel with the Bank of England a stage further. According to his meticulous reading of the original Acts, joint-stock banks, provided that they did not issue notes, could quite legally be set up even with sixty-five miles of London, an opinion hotly disputed by the Bank. The difference arose from the fact that when the Bank was first granted its monopoly, note issue was considered inseparably essential to banking. That this was no longer the case seemed a large loophole for Joplin and his supporters, but a mere unjustified quibble to the Bank of England.

(This author’s minor correction of punctuation; italics in original.) And indeed, when the European Central Bank was set up, note issue was considered inseparably linked to the legal nature of ‘legal tender’. Will it continue to be thus?

PS. Also see the later essay, The end of EMU: How the Germans could leave (dated March 2001), which discusses how a private-sector company could take Germany out of EMU.

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