Will the euro survive until 5 July?

This headline may look like a cheap way of bulking out my own series of Questions to Which the Answer is No, but I ask it in a genuine spirit of inquiry. I am puzzled by the absence of any serious economic commentator who suggests that the euro will survive for longer than a few years at most. They all seem to say that the currency could survive if several impossible conditions are met.

The latest of these is the Spanish demand for a “banking union” in addition to the fiscal pact, which itself needs to be further federalised into a full fiscal union. Neither of these seems likely to happen.

There would then need to be a reversal of what the Guardian, paraphrasing the Spanish government’s view, describes as “a European failure of leadership in persuading the financial markets that the euro would be defended at all costs”. Yet we are repeatedly told that the German taxpayer would balk at such an open-ended financial guarantee.

You do not have to be an economist, it seems to me, to realise that the euro could not work, is not working and will not work. Its defects are fundamental. Hence the impossible conditions for its survival: that the eurozone becomes one country; or that German taxpayers subsidise mass unemployment in several periphery countries for the indefinite future.

There is surprisingly little interest, then, in how the currency might be dismantled. In Britain, this is only polite: Eurozone members hate being lectured by us on how wrong they were. Among eurozone members, it is the deep certainty of Continental elites that the euro is the core of modern Europe. That is starting to break down, but seems to have a long way to go before German, French and other leaders face up honestly to the problem.

Which is why I mention 5 July. That is when the judges – listed here, along with chairman Derek Scott, Tony Blair’s former economic adviser – will announce the winner of the £250,000 Wolfson Economics Prize for the best plan to manage the break up of the euro. The prize, sponsored by the Charles Wolfson Charitable Trust, is the idea of Lord (Simon) Wolfson (pictured).

The shortlist of five was announced on 3 April:*

Roger Bootle and team, Capital Economics

Cathy Dobbs, private investor

Jens Nordvig and Nick Firoozye, Nomura Securities

Neil Record, Record Currency Management

Jonathan Tepper, Variant Perception

The delay, according to Scott in the audio clip on BBC News, is because he asked the five to “go back and take account of the judges’ comments”. They had until midnight last night to “refine and resubmit” their entries.

It is hard to tell exactly how fast events are moving, but there must surely be a risk now that the competition will be overtaken by the crisis of the Spanish banking system.

*A summary of the shortlisted entries, taken from the Policy Exchange announcement:

The essay from Roger Bootle and Capital Economics provides a practical guide to the issues around exiting the euro.  Their central focus is how to achieve a fall in real wages and prices with the minimum practical disruption. This essay proposes that government debt and consumer debt be redenominated into euros deploying the ‘lex monetae’ principle – in other words, that each country determines the currency applicable under its laws.

In an original and elegant solution, Catherine Dobbs proposes that the euro disappears, with all holders of euros having their euro claims replaced by claims on the new currencies, according to a set proportion.  The key objective is to disincentivise capital flight (and hence bank runs and financial and social crisis), whilst being fair to all holders of euros.

Jens Nordvig and Nick Firoozye argue convincingly that the treatment of foreign law debt contracts is important because there is around €10 trillion outstanding. Their essay proposes that debt contracts falling under national / local law should be redenominated into a new currency.  Debt contracts falling under foreign law should be redenominated into a second European Currency Unit (ECU).

Neil Record argues that if any country leaves the euro, the entire euro must be dissolved. He writes that the moment one country leaves the euro, the view that the euro is ‘permanent’ becomes untenable, giving markets the ammunition to undermine structural weaknesses elsewhere.  The essay’s focus is administrative, emphasising secrecy for as long as possible and setting out a detailed week-by-week timetable.

Jonathan Tepper contends that currency exits and devaluations are often predicted to lead to “Armageddon” but rarely do. The paper argues that the real issues are not created by the exit process per se, but by the needs that motivate the exit — the need for Eurozone periphery countries to default and devalue.

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• sheffieldutd

  UK to be given 4th July as a national holiday – well it IS the poorest and smallest province of the American Imperium. 

• greggf

  “A summary of the shortlisted entries, taken from the Policy Exchange announcement:”

  What I find interesting is that the use of parallel currencies is not considered. Whereas, to me it seems obvious as a possible solution since the idea is already used in Latin America, albeit unofficially.

  Many countries have operated parallel currencies, for instance; it was, and may still be, common for people to buy and sell property in Buenos Aires and Rio de Janeiro in US dollars and also obtain US $ loans. Countries with weak currencies have often turned to a stronger and a more global one as a means to effect payment and purchase where local conditions dictate, usually moderate to high inflation. Exchange into the host currency is normal, but, as experience shows, is not always genuine and leads to crises like Argentina had in the 1970s and more recently in 2002. But such crises always concern  the value of host currency against the US $ and never the US $ itself, so when they are over the practice returns at the new rates.

  In the EZ  weak economies, PIIGS, exactly the reverse applies; the “local currency”, the euro, is too strong, causes deflation and capital flight. But the same balance of criteria might apply if a weaker currency were to exist, say in Greece. 
  Greece could convert all it’s internal finances, wages, salaries, payments, bills etc., into new-Drachma which its own central bank in Athens would manage. The new Drachma would be freely exchangeable into euros and vice versa; which currency, the euro, would be the responsibility of the ECB, or Bundesbank.
  Clearly the new-Drachma/Euro exchange rate is important, but notwithstanding the forex markets would soon adjust that appropriately.

  Parallel currencies could exist indefinitely because, as in Latin America, the refuge of an inflation-free investment will always be sought where inflation is endemic.

• Kugelschreiber

  Thanks for the short  Lord Wolfson video John Rentoul.  I found it very useful, he explained everything so clearly in the space of less than 2 minutes!  Yet the clearest explanation I’ve seen yet.

• Toocleverbyhalf

  Cast your reading net a bit wider.  The collapse of the euro seems to be a peculiar British (dare one say little-English?) obsession.  Denis MacShane assures us today in the Guardian that the continental papers reflect a broader range of arguments.

  Those of us unable to talk foreign can read what US commentators have to say.  They mostly seem more concerned with US levels of debt (which seem to be higher per head than eurozone ones) but no one is yet predicting the break up of the Dollar zone (even though that might help California deal with its little local difficulties)

• Sharon Ann Accountant

  If any of these “experts” knew the euro wasn’t going to survive, they would mortgage their house for a loan in euros, spend all the money now, and pay the loan back when the euro was worthless.

  None of these experts is willing to take the chance. To a man, they’re clueless twits, trying to get some media attention.