From previous blogs (see here and here) you can see that we are not a big supporter of the single currency from an economic point of view. However we recognise the authorities’ political and economic desires to maintain it despite its economic inefficiencies. This does not stop us thinking about policymaker options. If the single currency is to be unwound what is the least damaging way to do it?
We have spoken before about the concept of the neuro being a successor currency to the euro. This is required to ensure a more orderly market can continue in financial and commercial contracts drawn up in euros, and to more fairly balance the outcome of the euro’s demise between savers and borrowers.
This neuro basket of currencies would succeed the euro in much the same way as the euro succeeded the ECU. The basket of currencies forming the neuro could be based on euro area nations’ contribution to ECB capital as per the table below.
The single currency vision is under huge stress, signalled by German board members defecting from the ECB, outside central bank governors like Mervyn King talking about unmentionable unmentionables, and comments from outside government officials like Geithner, and yesterday William Hague who said the euro is ‘a burning building with no exits’.
The authorities need to examine a plan b to at least mitigate the disaster that a disorderly introduction of national currencies would bring. The existence of the neuro as an alternative plan b, even if never enforced, would provide less downside than current thinking and so help market stability.
First of all comments by Geithner and Hague are meaningless. Both are politicians (albeit only one elected) and Hague’s, on the eve of the Tory party conference, are doubly worthless.
The EU has gone to great lengths to bring a single market into force. Not least by the removal of non-tariff barriers. Different currencies and different exchange rates offer a powerful non-tariff barrier. Although, despite the UK having devalued greatly it still runs a huge trade deficit and offered no advantage ultimately to the likes of Bombardier.
The demise of the Euro would encourage the rise of non-tariff barriers. Indeed those who advocate Greece’s default and it leaving the Euro imply this in their logic of competitive devaluations. The rise of such barriers would mark the end of the single market and promote the raising of trade barriers as in the 1930s.
Fiat money rests on the back of trust in governments. UK governments have long proved to be not worthy of trust on a whole range of matters not least the value of sterling. It would be a dangerous path to spread this virus to the rest of Europe.
No-one on the streets in Germany, Netherlands and Finland trust the euro as a currency. The currency has lost its integrity