The best way to manage a Eurozone break-up

The Wolfson Economics Prize has challenged the world’s brightest economists to prepare a contingency plan for an inherent break-up of the Eurozone.

The Wolfson Economics Prize has challenged the world’s most intelligent economists to prepare a contingency plan for a potential break-up of the Eurozone.

The five shortlisted entries each provide valuable ideas about how best to manage a member state leaving the euro.

The five ideas are as follows:

Roger Bootle and team, Capital Economics

The paper produced by Bootle demonstrates that the weaker Eurozone countries are profoundly uncompetitive. The alternative to years of austerity is departure from monetary union, which would result in a weaker currency and cheaper exports. The submitted paper is a practical guide for how that could be achieved. Preparations for exit would be made in secret, with temporary capital controls. The government should redenominate its debt in the new national currency, guaranteeing a default.

Cathy Dobbs, private investor

Dobbs uses the analogy of dividing an egg into its white and yolk to explain how an orderly breakup of the euro could be achieved. She would split the single currency into two (or more) regions, with countries that need to be made more competitive the yolk regions and those that do not the white regions. Each region would have its own central bank, monetary policy and currency unit. All euros would be treated equally and get exchanged for a basket of the new currencies at an agreed and fixed exchange ratio – and it would be up to them to decide which currencies to exchange them to.

Jens Nordvig and Nick Firoozye, Nomura Securities

With around €10 trillion (£8.3tn) of foreign law debt contracts outstanding, economists Nordvig and Firoozye maintain that a fragmentation of the single currency would risk a legal minefield and hence quickly become disorderly. They suggest that debt contracts falling under national or local law should be redenominated in the new currency of a country leaving the euro, and that debt contracts falling under foreign law should be redenominated into a ECU-2 currency.

Neil Record, Record Currency Management

Record contends that Germany should commission a top-secret task force, to prepare a plan for use only should one country be imminently leaving the Eurozone. The plan would call for an emergency meeting of the leaders of the 17 Eurozone states, and the German chancellor put to them the proposition that they collectively, and immediately, abandon the euro, reverting to their national currencies at euro entry rates. The ECB would be abolished and its functions returned to the national central banks. All bank accounts, assets, liabilities and obligations in each member state would be immediately redenominated into national currencies.

Jonathan Tepper, Variant Perception

Tepper states that although economists expect catastrophic consequences if a country exits the euro, during the past century, 69 countries have departed from currencies with little downward economic volatility. His submission argues that the real problems are created by the weaknesses that lead to the pressure for exit in the first place. Tepper believes that departure from the euro would be good for some countries. Departing would accelerate insolvencies, but would provide a powerful policy tool to restore competitiveness via flexible exchange rates. The European periphery could then grow again quickly with lower debt levels and more competitive exchange rates.

The winner of the Wolfson Economics Prize will be announced on the 5th of July. To find out more about the entries, visit the Policy Exchange website.

 

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