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:
Tagged in: euro, euroscepticism, headline
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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