Back in mid-May, an interesting rumor hit the forex market and caused the Euro to sharply decline. The rumor consisted of the possibility that the German government was ready to reintroduce the Deutschemark and exit the European Monetary Union and the Euro.

Also, the rumor seemed to stem from a rather dubious source - an online conspiracy theory forum - where a purported employee of the Deutsche Bank stated the following in his post:

"I'm working at the Deutsche Bank in Germany. Today we delivered 1 container with new Deutsche Mark notes and new coins. I will present a photo from the new banknotes tomorrow morning."

Needless to say, the photos of the new currency did not appear the next day, but the poster did say that the currency change would take place that weekend, May 16, 2010. He also claimed that German Chancellor Angela Merkel would give a speech to the German people about the German currency's revival.

Survival of the Euro in Question

Because of the current sovereign debt crisis, which has the European nations scrambling for solutions, the continuation of Europe under one currency is becoming increasingly questionable. The primary reason for this is because the poorer nations are being bailed out by the more affluent nations, which in turn may have to be bailed out as well.

The order of potential failures on sovereign debt has Greece first in line, with Spain and Italy not far behind, and these nations will probably require a substantially bail out to avoid a debt default. This will in turn affect the other larger European economies as their debt ratings are reduced and the Euro continues to slide as a result.

Furthermore, if the joint €750 billion European Union and International Monetary Fund bailout package proves insufficient to bail out problematic states such as Greece, Spain, Portugal, Italy, Ireland and other Eurozone countries with financial problems, the idea of a new German Deutschemark does not seem so far-fetched.

Germany Allegedly Printing Deutschemark Banknotes

Because of the severity of the sovereign debt crisis, and with the intention of distancing itself from Greece and the other troubled nations which started the crisis, the still unsubstantiated rumor generally tends to imply that the Bundesbank, the German central bank has been ordered to print a new series of Deutschemarks. Apparently this was done as a contingency plan in the event that Germany might choose to leave the single European currency the Euro.

Despite the rumor having yet to be confirmed, a move like this would be completely understandable given the current political and economic divide among the top European states. Also, ever since its inception in 1999, the Euro was a hard sell, especially for the German public.

Furthermore, the Deutschemark or Mark had achieved the number two spot for reserve currencies, behind the U.S. Dollar, and it was considered a top choice for a reserve currency among governments and investors worldwide that tended to view the Deutschmark as one of the world's most stable currencies.

Consequences of Germany Leaving the European Monetary Union

The first likely consequence of Germany leaving the European Monetary Union or EMU involves the subsequent devaluation of the Euro. The German Mark made up a large percentage of the intrinsic value of the consolidated currency, so Germany exiting the Euro would tend to push that currency considerably lower.

The second consequence would consist of other stronger nations following suit, with France more than likely to be the second of the European economies to bail on the Euro. This scenario makes some sense, and could be likened to a domino effect or perhaps a game of hot potato where no one wants to be the last caught holding the potato.

While the original rumor had the reestablishment of the German currency happening over the weekend of May 16^th, a new thread on the same conspiracy website is now claiming that that the move will take place January 1^st, 2011, or 1/1/11. They also suggest that France will be next, already making arrangements to bring back the French Franc.

Conclusion

While nothing has yet been substantiated with these Deutschemark reissuance rumors, the dismal performance of the Euro on world markets has very likely been indicative of something considerably more than just the Greek sovereign debt crisis moving the currency's price action south.

Accordingly, if you have forex trading positions in the Euro or your investment vehicles include Euro-denominated bonds or other Eurozone investments, you would probably do well by reconsidering your options in the light of what may, perhaps inevitably, come to pass with respect to the Euro's rumored breakup.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.