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6:58am on Tuesday, 7th October, 2008:

Money in the Bank


When Ireland announced last week that it was extending its guaranteed personal savings coverage to 100% at six Irish banks, there was a sudden flow of capital from other banks operating in Ireland (eg. UK-owned ones) to the Irish banks. It was very irresponsible, as it could have caused a run. It also meant Irish banks had more money around to lend to people (although whether they'll lend to each other remains to be seen).

The thing is, the Irish government probably doesn't have enough money of its own to be able to guarantee those savings. If those banks did fold, they would not be able to hand everyone the money they had — it would be years before they saw it. They might not get it until inflation had reduced its value to nothingness.

Likewise, Greece and Germany aren't able to hand over money just like that should a bank collapse. They don't have it.

Denmark, on the other hand, which also issued such a guarantee, can genuinely pay out all users' savings. The reason is that Denmark (like the UK) is does not use the euro. The Danish government can print as much money as it likes. Yes, this would mean a sudden drop in the value of the krone and a sudden increase in inflation, but people would get their money back right away rather than riot in the streets.

There are, therefore, some advantages to being in Europe but out of the Eurozone.

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Copyright © 2008 Richard Bartle (richard@mud.co.uk).