Let’s start our rollback from the eurozone
Itâs time to think the previously unthinkable and consider how to unscramble the eggs. Itâs time to think about how to back out from the euro.
No one country can easily do this. The provisions donât even allow for it to happen.
Much talk emerges of âthrowing Greece out of the euroâ but nobody knows what that means.
We saw in Cyprus the introduction of massive capital controls, controls on banking transactions and transmission.
For a while there was a two currency regime in effect in Cyprus. Yet Cyprus remains in the euro.
So how can Greece be âthrown out of the euroâ and what would it mean in practice? I supported the idea of the euro. Naively , I imagined this would be a step on the road to an ever-closer union.
A currency union without a functioning central bank and without a fiscal and transfer union is unsustainable, however. History is littered with the remains of mere currency unions.
However, instead of the euro being a step on the way it became an endpoint in and of itself.
By denying states the ability to devalue while neglecting to create effective economic union countermeasures the politicians of the early noughties created a monster. That monster has resulted in the worst of all worlds.
A currency union with integrated wholesale banking but which retained retail banking as nationally orientated resulted in a network of banks interconnected through the capital markets and thus exposed to the weakest link. At various times that link was Ireland, Portugal and Spain.
To prevent the whole house collapsing the ECB extended extraordinary liquidity, but in doing so got dragged into fiscal policy.
This in turn has allowed the politicians, who run fiscal policy, to feel that they can dictate monetary policy.
No one country can leave the euro. The administrative and legal complexities of backing away are almost insurmountable.
Faced with the prospect of redenomination risk, deposits would flee faster than Greek deposits have done. And yet, if we will not move forward and create an economic and transfer union, and we will not go back, then we have stasis.
The next eurogroup meeting should, but of course wonât, begin the setting up of a technical working party.
Rather than correcting the Greek homework and flinging it back with âcould do betterâ they should consider the steps to an orderly breakup of the eurozone.
What would this look like? Target2 balances might seem an issue, with some who know better howling that the âlossesâ would âbankruptâ national central banks. National central banks with control of their own currencies cannot go bankrupt.
The normal accounting and business rules simply donât apply. So that is not an issue, at least not one that is a deal-breaker and cause to stay. Redenomination risk of existing assets and liabilities is a problem.
Irish assets and liabilities would shrink as the âpunt nuaâ would be discounted versus the euro, while the neue deutschemark assets and liabilities would rise.
However, a solution here might be to have a parallel currency, whereby existing assets and liabilities remain in euro and all new transactions happen in the new currencies.
Legal and technical barriers may be a bigger obstacle. However, laws can be amended and computers reprogrammed. The US economist Barry Eichengreen feels these barriers may be the biggest to euro breakup.
I disagree. The biggest barrier is political. Part of this is the inveterate need of politicians to be right, even when wrong. No politician easily admits error.
Another factor is the genuine sense that so much political capital has been poured into the eurozone that to walk away would be folly.
This is, however, a political sunk-cost fallacy. The capital has been expended and canât be recovered. To save face, letâs not call this a eurozone breakup but a rollback.
I am not advocating Ireland leave the euro. We canât do a solo run. What we can do is offer to start work on the rollback. We have the political DNA to make it happen, so letâs do it.
