Summary excerpt:
"Given the extent to which the dollar is currently over-owned by foreigners and while the euro is under-owned internationally, it is the dollar which is likely to suffer most from a eurozone monetary crisis, at least initially. The euro’s fate as a medium of exchange will then be principally in the hands of its users. This will be the background against which Germany’s Bundesbank will be considering its options.

A failure of the Eurosystem, which we can now see is becoming inevitable, has also been seen as a danger in some quarters of the Bundesbank, whose staff under Weidmann looked into the reasons for TARGET2 imbalances. Doubtless, the internal arguments over the situation were put on hold by his resignation last year.

This is the logical conclusion from Weidmann’s letter to Mario Draghi at the ECB. It therefore follows that somewhere in the bowls of the Bundesbank there is a Plan B in existance, which at the least will be intended to insulate the Bundesbank from the difficulties faced by other national central banks and the ECB itself in a crisis. This can only be achieved with a new currency, based on the German mark before it was folded into the euro. That way the euro-based Bundesbank can be written off as the Eurosystem collapses, while a mark-based Bundesbank emerges.

Germany will not want to resuscitate old enmities. The Bundesbank will be acutely aware what pursuing its own interests would mean for the PIGS, and also for France whose eurozone ambitions are entirely political. Interest rates in the replacement currencies for these nations would almost certainly rise sharply, collapsing their bond markets insofar as they still exist, undermining any surviving commercial banks, and destroying national finances. These nations would have no practical alternative but to seek the shelter of a better form of money than the euro to re-establish their bond markets, and with a view to having continuing access to credit. In short, the monetary consensus could eventually move from an overtly inflationary monetary system gamed by the national central banks and their regulators to one based on a sounder form of currency and credit.
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The obvious solution is for German to adopt a credible gold standard, and to encourage other member states to do the same. Figure 2 shows the official gold reserves of key member states.[vi]
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The ECB’s gold reserves were originally created by transfers from the national central banks, so we can assume its 504.8 tonnes will be transferred back to them, because other than other EU central banks outside the eurozone they are the ECB’s only creditors.[i] That being the case, the top ten eurozone holders will have over 10,500 tonnes between them. The gold is, however, unevenly distributed, with Germany, Italy and France possessing significant reserves. But Holland and Portugal have ample reserves for their size as well.

While credible gold standards are the best solution, all these nations, including Germany, are likely to be reluctant to mobilise their gold to back new currencies. Germany recovered from two currency collapses in the last century without gold backing, and the Bundesbank is likely to take the view that mere possession of its gold reserves and its historic reputation for sound currency will be enough to convince its citizens that a new mark will be stable and a credible currency. Furthermore, it is not sufficient to turn fiat into gold exchange currencies without addressing government spending. Not only does a successful gold standard require balanced budgets, but a deliberate reduction in overall spending must be maintained for the standard to stick over time. The failure of the Maastricht treaty in this respect illustrates the difficulties of fiscal discipline in the European context.

Politically, it requires a reversal of the European social democratic ideal, risking a political vacuum, threatened to be replaced by various forms of extremism."