Posts Tagged ‘Eurozone’

How to leave the Euro..

Of course, a paralell currency wouldn’t work, unless the government could CREDIBLY declare, that it would never devalue (compared to the Euro), and that it would redeem the New National Currency (NNC) at par in Euro at a future date -OR- indefinitely accept them for tax payments. (at par). Otherwise, everyone wants to get rid of NNC ASAP.
So, if the goverment introduces a NNC without official conversion, without „officially“ leaving the Eurozone, it could succeed only if it made the NNC dual legal tender at par – thus allowing ALL domestic debtors to serve all debt and all contracts (if the choose so) in NNC. Following Gresham’s law, we should expect NNC to replace the Euro in everyday circulation very fast (everyone tries to hold on his Euro-Assets – and pays everyone in NNC – anticipating future devaluation.)Of course, this would likely lead to some severe cases of abuse (banks paying their best customers in Euros, but converting deposits of ordinary citizens in to NNC). Once the peg between NNC and Euros is abandoned, NNC will likely devalue significantly, and the country might still have to default on its Euro denominated debt.

So the most honest approach would be a clean break. Close the banks for a few days, announce that since 12 years (ca.) Euros have been OUR NATIONAL CURRENCY, and therefore, all debt/contracts denominated in Euros have allways been denominated in our national currency. As from today, we have a new NNC, and all assets and liabilities are converted at a fixed rate. (most likely at par). For international transactions, people can buy Euros at a surchange (in limited quantities). But for some time, you likely will have to introduce capital controls.
Of course, once a country leaves the Euro – either by dual legal tender or conversion – everyone will run to the exit (who will be next? – expect the mother of all bank runs).

The only really safe method to dis-assemble the Eurozone would be a joint declaration of most of the countries („We just realized that it can’t really work“) and therefore, they split the Euro in 18 different ‚Euros‘ – (one international, and 17 national). In each country, all domestic contracts (and debts owed by locals) are in national Euros (as are the coins), while international contracts and exiting banknotes are in „international Euros“. Some countries might peg their currencies to each other, but most would float. If you pay in cash (in banksnotes) shops would use an exchange rate – (all payments by card or cheque will be in the local Euros of the shop) – until this becomes unconvienent enough, so that each country introduces it’s own banknotes again – they will then read 100 Euro Italiano – LIRE or 100 Deutsche Euro MARK. (at least the first series would still use the word Euro). That way, you could avoid the blame game.

Unfortunately, I think this is extremely unlikely, as it would require politicans to aknowledge failure.

So, absent a real fiscal union, the EU will try to kick the can still further down the road, although the downward spiral seems to accelerate fast.
And the first country to jump the boat will need a good excuse (blame the others, that is), and shortly thereafter, everyone will blame everyone else (WE never made a mistake, it’s just those criminal others) – so not only the Euro, but the EU and even peace in Europe will most likely be gone.

With the pace downward now accelerating, the collapse might still come in time for your bet, although there might not be a place left standing where to collect the prize at in 19 months time…