Solutions for Europe



Some of you may recall that Lord Wolfson (of Next stores fame) launched a contest in Britain asking European economists to put forward proposals for an orderly exit of one or more members from the European Monetary Union—i.e. the euro. Now that the deadline for submissions is passed, some of the participants (620 teams submitted papers) are beginning to make their solutions public. Among them, Spanish economists Pedro Schwartz, Francisco Cabrillo and Juan Castañeda. Their proposal has been published in Spanish in Expansión, the leading financial publication in Spain. It is one of the most sensible ones so far.

According to the Maastricht (1992) and Lisbon (2009) treaties, in practice the only way to leave the euro is to leave the European Union. The exit of a member from the EU altogether, as opposed to just from the Eurozone, would trigger political chaos among Europeans convinced that the union must stay and who are obviously willing to pay any cost to prevent such an outcome. The challenge, therefore, is to find a solution compatible with Greece´s continued membership of the EU, which precludes the most reasonable outcome—i.e. Greece´s exit from the euro.

The Spanish economists´ plan entails allowing the euro to coexist freely with a new and devalued drachma; letting the Greek government default on its payments and start bankruptcy proceedings; guaranteeing the deposits of the Greek public; finally, helping recapitalize banks that hold Greek debt in Germany and France.

The coexistence of multiple currencies that included the euro would impede the breakup of the union since it would involve a suspension, not an expulsion, from the Eurozone. The default would translate into a big “haircut” for everyone, including the European Central Bank, but would let Greece breathe and would cease the endless bailouts. Guaranteeing the deposits would prevent violence on a scale probably greater than the horrific scenes we have already seen in Greece. And helping recapitalize some banks that hold Greek debt would be the unpleasant price to pay for an “orderly” as opposed to a traumatic transition, that is, for a politically feasible solution. The authors calculate that it would cost less than the endless bailouts that have already taken place and will take place in the future, not to mention the potential consequences of the ceaseless money printing by the European Central Bank.

The old euro-denominated debt would be greatly reduced, but people would choose in what currency to express the new debt, trade and pay taxes. The government´s domestic spending would be stated in drachmas. Nothing, of course, guarantees that, once the economy was able to revive thanks to the devaluation and the lifting of the heavy debt burden, the government would be fiscally responsible. But, if it didn’t, the market would respond by devaluing the drachma against the euro and punishing the people—which would make the government accountable to them rather than to the Eurocracy.

There are many instances of two or more currencies coexisting in one territory, from Castile in the 17th century to several Latin American countries where worthless local currencies prompted people to trade in dollars until recently (some still do, and I am not referring to Panama, El Salvador en Ecuador, where the dollar is an official currency).

We have become so used to hearing about Europe´s problems that we forget that many people and institutions are coming forward with sensible responses to the crisis, albeit without much heed from the authorities so far. Recently, for instance, a group of 16 think tanks from eight European countries plus 38 European personalities signed a document in Bratislava called “Initiative for a Free and Prosperous Euope”. This is the aim of the initiative:

To draw attention to the risks and devastating consequences of the current and scheduled attempts to solve the debt crisis by increasing the political and economic centralization of Europe´s decision-making processes in Brussels: the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), the purchase of government bonds by the ECB, the attempts to introduce common European bonds or taxes, and other centralizing experiments. Among the consequences of such interventions are a deepening of the debt crisis without it being solved in any way, a decline in the purchasing power of the euro (an inflationary euro), a growing financial burden on the citizens of the European member states, concentration of power, and finally the limitation of liberty and prosperity for the people of Europe.

It is urgent that European authorities lend ears to the voices across the continent that have been raising concerns about the ludicrous response to what is happening from officials supposedly entrusted with the responsibility of applying common sense. Perhaps if they watched this hilarious summary of the European debacle titled “World Collapse Explained in Three Minutes” they would realize the farce that the old continent’s finances have become:

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