Dont sell the euro short.

Its here to stay

Reports of my death are greatly exaggerated, the gray-haired but entirely ambulant Mark Twain is alleged to have said while
on a European speaking tour in 1897. If the euro could speak, it would undoubtedly say something similar. And it would have
ample occasion to do so, since reports of its imminent demise are widespread.

The latest vote of no-confidence comes from Ted Malloch, tipped to serve as the Trump Administrations ambassador to the European
Union, who recently opined that he would short the euro, which he said could collapse in the next 18 months.

Leaving aside what passes these days for diplomacy, there are ample reasons to worry about the euro. The Greek crisis is coming to a
head yet again: The IMF and the German government are unable to agree on another bailout for the country, which owes a balloon
payment of interest next summer. Elections are looming in Germany, France and possibly Italy, the three big euro area states.

Acute observers will notice that the sceptics have been predicting the demise of the euro continuously ever since
its creation in 1999

In Germany, Chancellor Merkel appears to be safe. But a French government led by Marine Le Pens far-right National Front or an
Italian government headed by Beppe Grillos populist Five Star Movement are not inconceivable.

Both parties have opposed their countrys membership in the euro and pledged to offer a referendum on Europe. Their opposition is
grounded in the same kind of base nationalism that animates Trump and his followers.

Like the US president, Le Pen, Grillo and their supporters are critical of anything that limits their ability to pursue the national interest as
they narrowly define it, including (or indeed starting with) the single currency.

The fact that Europes currency has serious flaws helps them make their case. There is no European treasury to stand behind the euro and
direct fiscal policy. The banking union that is needed to complement Europes monetary union remains incomplete. There is still no
European system of deposit insurance to limit bank runs and panics, only an unworkable resolution regime intended to wind up, or more
hopefully recapitalise, bad banks.

The European Central Bank publishes neither votes nor minutes. It may be the worlds most independent central bank, but it is also the
least accountable.

The free movement of labour was meant to help temper imbalances in the euro zone. But labour has never moved as freely among euro
area countries as it does among US states language differences are only one reason for this and it will now move even less freely
as European Union countries clamp down on immigration.

Academic analysis acknowledges as much. The Nobel Laureate Joseph Stiglitz has enumerated many of these flaws in his book, the
euro: how a common currency threatens the future of Europe.

But acute observers will notice that the sceptics have been predicting the demise of the euro continuously ever since its creation in 1999.
Theyve been wrong for nearly 20 years. Shorting the euro in essence, betting on its breakup has been the widow-maker of
financial trades.

Two forms of glue hold the euro together. First, the economic costs of break-up would be great. The minute investors get wind of the fact
that Greece is seriously contemplating reintroducing the drachma with the purpose of depreciating it against the euro, or against a new
Deutsche mark, they would wire all their money to Frankfurt. Greece would experience the mother of all banking crises. The new
Deutsche mark would then shoot through the roof, destroying Germanys export industry.

More generally, those predicting, or advocating, the euros demise tend to underestimate the technical difficulties of reintroducing
national currencies. They suggest briefly imposing capital controls to prevent holders of euros from fleeing while the new money,
electronic or other, is quickly put in place. This ignores the complexity of actually removing controls once they are adopted. Recall the
experiences of Iceland and Cyprus, which required years, not days, to completely remove their temporary controls.
The proponents advocate quickly restructuring the debts of banks, firms and households with euro-denominated liabilities, without
realising that one persons debt is anothers asset. Moreover, because borrowing and lending occurs across borders, agreement on debt
restructuring will require lengthy negotiation between countries if the country abandoning the euro is to avoid harsh retaliatory measures.
This process would make the UKs Brexit negotiations look like a stroll in the park.

For southern European countries, there is an additional complication. They would have a massive bill to the European Central Bank, and
by implication to the other member states that are shareholders in the ECB, in settlement of their so-called Target2 balances, liabilities
incurred as a result of cross-border payments in central bank money.

ECB President Mario Draghi recently made clear that countries abandoning the euro would be presented with this bill.

For Italy, to pick a case not entirely at random, those balances currently stand at 360bn euros ($383bn), or approximately 6,000 euros for
every man, woman and child. Thats about 10 times on a per capita basis what the UK likely owes the EU as alimony for its divorce. And
if a country like Italy chooses to default on its Target2 obligations, it will be unceremoniously kicked out of the EU.

This brings us to the second form of glue, namely that European countries, Britain aside, still attach very considerable value to EU
membership. That membership matters even more now that that President Trump has cast NATO into doubt and the United States is no
longer seen as a reliable ally.

The example of UK Prime Minister Theresa May, reduced to cozying up to Mr Trump and Turkish Prime Minister Recep Tayyip
Erdogen, is not one that many other European politicians care to follow.

In a 2007 article, I too made a bet namely that the euro, while flawed, wasnt going away. I argued that it is the roach motel of
currencies. Like the hotel California of the song: You can check in, but you cant check out.

For 10 years Ive been right. To be sure, past performance is no guarantee of future returns, as any prudent investor knows. Even so,
unlike ambassador-in-waiting Malloch, I continue to think that shorting the euro is bad advice.

Eichengreen is George C. Pardee and Helen N. Pardee professor of economics and political science at the University of California at
Berkeley.

Bloomberg/The Washington Post Service

Published in Dawn, Business & Finance weekly, February 13th, 2017