Euro Fragmentation? Yes, SEPA can !
NOTE: Better informed people have since told me that the TARGET-2 system used to clear € payments makes central banks notional counterparties to all cross border payments (with the actual risk being on the ECB). So the self-regulating market mechanism I sketch below couldn't function within the current Eurozone payments infrastructure.
There are no Euros. Apart from the cash in Euroman's pockets and bank's reserve balances at the ECB, everyone on the continent actually owns a € loan to their bank collateralised with whatever the bank has re-lent it on. The bank credit that Deutsche Bank creates when it makes loans, is tied to Deutsche. If you wire money on deposit at Deutche to a friend who banks at HSBC, Deutsche now owes that money to HSBC (and HSBC owes it to your friend). If too many people move money from Deutsche, the receiving banks will start to demand some of Deutsche's assets.
In a modern industrial economy, money is privately created by banks under license from the nation state. On a day-to-day basis, the issue of money is governed by the private decisions of bank managers. A bank's issuance is constrained by the assets they have available to cover bad loans and the demands of other banks. (And prudence.)
Supposing we have two countries sharing a currency but not a banking policy. The value unit used, or a least its name, is forced to stay the same in both jurisdictions. However, without a shared banking policy, the real value of assets required by a bank to back each value unit could vary.
If, let's suppose, Greece had a major debt issue, it could relax the ratio of bank assets to Euros. Greek banks would inflate the local Euro supply, easing debt pressures. As Greeks wired money out of their country to buy beer and London real-estate, foreign banks with their tight capital requirements would find themselves having lent an uncomfortable amount to the sending Greek banks. If they asked for assets from their Greek bankers, the cost to the lightly capitalised Greeks of providing them will be much higher.
If a mound of coffee can be presented to a German bank for a €300k loan or a Greek one for a €500k, we have a fractured currency zone, regardless of the denominations of those deposits. Any transfer out of Greece is going to cost the Greek bank the difference between the two capitalisation standards. Transfers of precious "hard" deposits into the Greece might receive a premium, as they can be used to pay for valuable imported goods.
Debtors in Greece would send their good and legal Euros onto their creditors, and those credits would be hit by a 16% "transfer fee". A German wiring money to a Greek relative might receive a "clearing rebate" of 19%. This fragmentation could happen as a natural reaction by private banks to varying national capitalisation standards. No embarrassing government decision would be necessary. Depreciating Greek deposits would earn higher interest rates which would compensate new investors. (Old investors would be stuck earning 3.2% and loosing all of it in "transfer fees".)
Providing that the Eurozone's printing presses are all in the core countries, physical euros would be free to decouple from the domestic deposit Greek euro. Transfer by Greek banks to purchase euro notes would be subject to the same "transfer fees" as any other, and the banks would pass them onto customers as "fair value-based tariffs" for cash withdrawals.
(A well-capitalised Greek banks might prefer to tie themselves to the core euro-area capitalisation standards and be treated as equals by German banks. Although, I suspect the Greek government might dislike them for it.)
This would, of course, be a massive sham. Economically, it would be the reintroduction of the Drachma by the back door. But politically, it would be an awfully convenient sham!
"We're doing everything we can to hold the euro together but these infernal bankers and their profiteering evil ways imposing upon the good people ... technically legal but ... failure of social responsibility ... I changed the barometer unjust clouds refuse to move ... parasites" :-)