April5th 2012: Lord Wolfson, Chief Executive of Next, the high street retailer, recently offered a prize of £250,000 – yes pounds, not Euros – for the best essay on how best to manage the disintegration of the Euro-zone.
As I wrote in my article: The Euro – there is no such thing as a free right answer, there is no doubt that, “ailing countries, for whom the Euro is overvalued, should leave the Euro-zone, revert to their national currencies and allow those currencies to find their own levels on the foreign exchange markets”. That is not in question.
For Nationalists, the Euro-zone is unacceptable politically but recent experience has shown that, for many countries, it is also unacceptable economically. However, we cannot hide the fact that withdrawal from the Zone would be fraught with difficulties: for the withdrawing country or countries; for those still in the Zone but contemplating withdrawal; for apparently-thriving members of the Zone; and for those EU members outside the Zone. Even countries that are outside the European Union would not be immune to its effects.
Lord Wolfson, aware of the difficulties, offered a prize to the person who, or group that, could advance the best proposals for minimizing the difficulties. He recognised that it would be no good standing on the sidelines shouting for Greece or Spain or Portugal or Italy taking all manner of brave steps without considering the costs for them and for us. A short-list of the five possibly-winning entries has been decided and summarised in the Daily Telegraph. The winner will be decided in June and announced in July.
Mr. Neil Record, from Record Currency Management, emphasised the danger of piecemeal exits, one country at a time. Whilst this would be the likely manner of disintegration, it would, in his view, be, “a recipe for continuous crisis”. He suggested a secret German-orchestrated (presumably at a meeting of the European Council, of heads of state and government) dissolution of the whole Euro-zone and the abolition of the Euro, to be announced, without warning, on a Saturday morning. He regarded the preservation of a ‘core’ Euro-zone to be unworkable. In my article, I raised the question of long term contracts for the regular supply of goods, services or hire of plant, being frustrated (discharged by subsequent impossibility). Mr. Record suggested that all outstanding contracts expressed in Euros should be frustrated by operation of law.
Mr. Jens Norvig of Nomura predicted that the first state leaving would produce a chain reaction from other ailing states that would eventually spin out of control. He said, “the genie is out of the bottle. This means spelling out contingency plans now to calm investors, above all by clarifying the jurisdiction of the 14.2 trillion Euros of debt”. He suggested a new European Currency Unit (ECU) to redenominate assets but not (presumably) to use as a medium of exchange.
Mr. Roger Bootle and a team from Capital Economics thought the best option would be for Germany and the thriving Northern European countries to leave the Euro-zone, leaving the remaining Euro-zone to the ailing Southern European countries. However, they conceded that this would not be a likely outcome and that it was hardly the proper role of ailing countries to invite the resignation of thriving countries! They therefore accepted that the only solution would be for the ailing Southern countries to leave the Zone.
They said that leaving the Zone would involve both currency redenomination (a posh word for a new currency with a new name) and devaluation (a reduction in the price of that currency). They claimed that whilst there were many precedents for each, there was none for both at the same time. I find this hard to believe but looking for the answer would be an unnecessary diversion
Mr. Bootle’s team said that ideally the strategy for exit from the Zone should be discussed openly. However, they conceded that that would be impossible, because it would precipitate a mass withdrawal of funds from banks in each withdrawing country and their transfer to banks in the North. Therefore, they said, preparations would have to be made in secret and implemented without delay.
They recognised that the difficulty with this would be the inevitable delay in being able to produce new notes and coins. This was not an insurmountable difficulty. As long as the starting exchange rate between the Euro and the New Currency was set at ‘1=1’, existing Euro notes and coins could be used for all cash transactions, because most transactions would be by credit and debit cards and electronic transactions. Of course, if I were a resident in such a country and I held a considerable sum in Euros, I should be reluctant to spend them in the domestic economy because their value externally would be considerable greater. Presumably banks in such ‘withdrawing countries’ would either issue no extra cash or they would ration it to a limited sum for each individual. A solution to this dilemma was suggested by another of the five finalists, Mr. Jonathan Tepper of Variant Perception. He suggested that banks would continue to issue Euro notes but that these would be stamped with national insignia. Presumably this would prevent them from being used as Euros in other Euro-zone countries.
I mentioned, in my article, the fact that devaluation would add to the burden of externally-held debt. Mr. Bootle and his team said that the country should redenominate its debt in the new national currency and explain that it intends to renegotiate the terms of this debt. ‘Renegotiate the terms of a debt’ sounds like a euphemism for default. Mr. Tepper said that 90% of Spanish, Greek and Portugese debt was ‘under national law’ and could be switched to the new currency, presumably without any need for that euphemistic ‘renegotiation’.
I have not read the entries in full but I shall do so when they are available on-line. What can we learn from them? Whilst withdrawal from the Euro will involve difficulties, it will not be impossible.
Why should that be of any concern to us? We are not in the Euro-zone and nobody seems to have any immediate intention for us to join it.
Withdrawal of one country or four or five, would have effects, whether ripples or tidal waves, on all countries in the EU and beyond.
Whilst there are no immediate stated plans for the United Kingdom to join the Euro-zone, neither of the main parties has ruled out membership for all time. It is still an express aim of the Liberal Democrats, a partner in the Coalition Government. A member of that Government, Mr. ‘Ed’ Davey, described as something called an ‘Energy and Climate Change Secretary’ said that it would be ‘reckless’ and ‘unwise’ to rule out joining the Euro, although he thought it unlikely to occur before 2020. Whilst I would not give much credence to what this ‘Ed’ person might think, so long as the Euro-zone exits, possible membership is a threat to the United Kingdom. The sooner it unravels the better.
Furthermore, we have said repeatedly that we are Anti-EU but we are not Anti-European. The countries of Europe are our nearest neighbours and we share with them a heritage that is cultural and (to varying degrees) ancestral. We cannot be indifferent to their fate. If the Euro-zone is politically tyrannical and economically disastrous and it is, we must rejoice at our friends being released from it.