The PIIGS Who Fell to Earth

Just past the bank closing time of 4 pm on Friday, passers-by at a number of secluded locations throughout Germany could hear the rumble of diesel engines coming to life, as rows of large unmarked trucks escorted by security vehicles began moving out onto the public highways. Roads were busy coming out from the city centers as holiday-makers were anxious to enjoy one of the last weekends of summery weather. Traffic was light coming into town, so the long convoys had little trouble moving quickly.  A few outbound motorists gazed with curiosity at the sight, but most paid little heed.

The convoys reached their destinations -- the rear entrances of most of the major bank locations throughout the Bundesrepublik. The security vehicles, blue lights flashing, blocked off the ends of the streets, and uniformed men began unloading one trolley-load after another of boxes, as armed guards scanned the streets. Within an hour the trucks were empty, and the supervisors spoke briefly into their mobiles. Then the men began extracting other boxes, filling the trucks again. Another hour, and they were gone.

In her office in Berlin, Angela Merkel waited by her phone.  A small group of advisors waited with her, unusually quiet.  Their eyes moved back and forth between the clock and the telephones. Finally, a ring shatters the silence. The defense minister picks it up. He listens, nods, barks an acknowledgment into the phone, and hangs it up. He turns to the chancellor.

The Rubicon has been crossed.

She nods. She turns to the foreign minister.

Time for the first call, then.

The aide dials a very private number. It is answered. He hands the handset to the chancellor.

Nicholas. This is Angela. I am very sorry to have to tell you this, under such circumstances. But you will understand why it must be like this. And I wanted to tell you first.

She relayed her news.

The aides could hear the scream of pure anger as Merkel held the phone away from her ear. The tirade continued for about half a minute. Then there was complete silence. She put the phone back to her ear.

My dear Nicholas, you can hardly complain. After all, you threatened me with the same thing back in May. You see, when you did that, you made explicit what has been the case for some time now. You have placed us in the Prisoner’s Dilemma. You are familiar with that?

Of course. We French know philosophy. The first prisoner who cooperates, gets the deal. In order to avoid having one prisoner betray the others, they must all have confidence that none will cooperate.

And among the Euroland nations with the ability to have a strong currency, the situation is the same. If any one suspects that another is about to leave, the only thing to do is leave first. When you threatened to leave, we realized that was the position in which we had been put. So we had to make our preparations.

Sarkozy spoke in a calm, level voice.

But I was not serious. It was a bargaining position.

Perhaps. But the Prisoner’s Dilemma requires certainly, not probability.

Sarkozy was silent for a long moment.

This is irrevocable? There is no action on our part that could stop this from happening?

No. We did not call to bargain. The time for that is past. The position of German bonds has begun to erode. We decided we had to act.

Very well. When will the public announcement be made?

At 11:50 tonight. The decree takes effect at midnight. That will give some time for adjustments to be made before the markets open.  And of course New York will be closed Monday, as it is a holiday there. We will close Frankfurt as well for the day; you may want to close the Bourse. I imagine Cameron will close the London markets as well.

Ah, who knows what he will do. Who will you call next?

The other major Eurozone leaders, except of course for the PIIGS. It is better that they have no warning.

Of course. What about Obama?

Just before midnight. I see no reason why he should have much warning. He might actually try to do something about it. Then I will call the Asians, too -- Japan, and the Chinese.

What about Von Rompuy?

Who? Oh yes. Why would I want to call him?

I see your point. Well, I am sorry that it has come to this. Of course, we must follow your lead, and we have little time to make the practical arrangements. You will excuse me, I need to make some calls.

Of course. I am sure you will need to summon your Cabinet.

Actually, New York is still open. If I call my broker I can get a few short contracts placed before they close.

At 11:45 that evening, Merkel hangs up on Barack Obama, pleading urgent state business. All of the leaders they felt obliged to pre-warn had been contacted,  and a variety of conversations, of various degrees of unpleasantness, had been concluded. All that remained was the public statement. Both a press release and a video had been prepared for release to the Web and to traditional media. Several television monitors were turned on, tuned to the various cable news channels. A few minutes after midnight, first one and then all channels featured stunned presenters reading in disbelief, while glaring banners crawled across the screens.  Ah, one was about to run her video. They turned up the volume.

…we now bring you the video released by the German chancellor.

“My fellow German citizens, fellow Europeans, and fellow citizens of the planet.  The continuing financial crisis has forced the German Federal Republic, acting on a consensus of all major parties, to take the following emergency measures. Effective at 2400 hours on September 3rd, which is to say midnight tonight, the German Federal Republic withdraws from its participation in the European Monetary Union and from its membership in the European Central Bank., effective immediately. The euro is no longer the official currency of the German Federal Republic. We are introducing, again effective immediately, a new national currency which will be called the New Deutschmark. The New Deutschmark will be valued initially at a rate of one NDM for one euro, but of course it will be allowed to float freely henceforth on international money markets. All debts and contracts denominated in euros will be deemed to be denominated in NDM under German law; all bank accounts in Germany denominated in euros will be automatically converted to NDM at a one-to-one rate. For the next thirty days, all euro notes bearing serial numbers denoting issuance in Germany can be exchanged for NDM notes at a one-to-one ratio; all other euro notes will be exchanged at the prevailing international rate. We have distributed large supplies of the new NDM notes to most major banks, and they will be available for withdrawal no later than Tuesday, and perhaps some before. As you can see, they are the same size and color as their euro equivalents, so that they may be used in vending machines.

"Of course, as Germany will no longer participate in the European Central Bank, staring immediately, our members of its Board will withdraw. It is welcome to remain in Frankfurt, but we understand that it may choose to relocate, in which it will receive every assistance from us. We will, of course, expect the prompt return of our contribution to its reserves.

"This news undoubtedly comes as a surprise to most.  You must understand that it was not possible to announce this news in advance. If we had permitted any period, no matter how short, to remain between the announcement that we would withdraw from EMU, and the actual withdrawal, speculators would drive down the value of the euro and all German assets denominated in that currency would lose substantial value. There is no good reason why such losses should be suffered. Furthermore, it is a fact that another major Eurozone nation had threatened a withdrawal from EMU in the course of a negotiation a few months ago.  This was alarming to us, as the first nation to leave will suffer the least damage. We could not take the chance that another would be first to leave, exposing us to more risk.

"We of course remain firm in our membership of the European Union and fully committed to the European project. Other EU member nations, including the United Kingdom, Denmark, and Sweden have participated fully in the EU without having been part of the euro experiment, and we, like them, will support EMU from the outside. We believe this action is the best available solution to the current crisis, as without our participation, and possibly without that of several other nations, the remaining Eurozone members will find a fiscal policy appropriate to their economic needs, and the currency’s value on the international market will serve as a boost to their export industries and tourism trade, easing economic adjustment. As the rates adjust, their existing international debt, which will remain denominated in Euros, will prove easier and easier to service and repay without external assistance.

"Thank you, and good night.”

The announcer, still appearing stunned, looked down at his desk.

“We will switch to our financial correspondent momentarily to discuss this startling  development, but I am now told that we will first cut to Paris, where President Sarkozy has scheduled a last-minute press conference as well.”

At the studio, Sarkozy endured a last powdering from the makeup artist as an aide handed him a sheet of paper. He looked confusedly at the president.

Monsieur le Président, c’est la fin, non?

Sarkozy stared back, calmly.

Enfin.