The greek mess shows how debased the whole Euro project has become. Its time to think the previously unthinkable and consider how to unscramble the eggs. Its time to think about how to back out from the Euro.
No one country can easily do this. The provisions don’t even allow for it to happen. Much talk emerges of “throwing Greece out of the Euro” but nobody knows what that means. We saw in Cyprus the introduction of massive capital controls, controls on banking transactions and transmission. For a while there was in effect a two currency regime in Cyprus. And Cyprus remained and remains in the Euro. So how can, and what would it mean in practice, Greece be “thrown out of the Euro”.
I supported the idea of the Euro. Naively , I imagined that this would be a step on the road to an ever closer union. A currency union without a functioning central bank, without a fiscal and transfer union, that is unsustainable. History is littered with the remains of mere currency unions. The Scandinavian union lasted for 54 years; the Latin Union for 62. Where are they now?
So, yes, I and other thought lets have the Euro, and then when it has settled down, move forward.
But instead of the Euro being a step on the way it became an endpoint in and of itself. By denying the states the ability to devalue while neglecting to create effective economic union countermeasures the politicians of the early noughties created a monster. That monster has resulted in the worst of all worlds.
A currency union with integrated wholesale banking while retail banking remained national orientated resulted in a network of banks interconnected through the capital markets and thus exposed to the weakest link. At various times that was Ireland, Portugal, Spain…To prevent the whole house collapsing the ECB extended extraordinary liquidity, but in doing so got dragged into fiscal policy. This in turn has allowed the politicians, who run fiscal policy, to feel that they can dictate monetary policy. The whole thing is a mess and Greece the latest, most curdled, iteration. Now that the greeks have been shown that liteally nothing they can produce will satisfy the procustean argument of the Troika, we see that the Eurozone is in real danger of becoming a mechanism for regime change sans gunfire. Quite why the PTB think that it would be good to see a return to the dready dyad of PASOK/New Democracy, who took Greece over the brink of run, that logic escapes me.
No one country, realistically, can leave the Euro. The administrative and legal complexities of backing away are almost insurmountable. Faced with the prospect of redenomination risk deposits would flee faster than Greek deposits have done. And yet, if we will not move forward and create a economic and transfer union, and we will not go back, then we are condemned to stasis.
The next eurogroup meeting should, but of course wont, begin the setting up of a technical working party. Rather than correcting the Greek homework and flinging it back with “could do better” they should consider the steps to Eurozone orderly breakup.
What would this look like?
TARGET2 balances might seem an issue, with some who know better howling that the “losses” would “bankrupt” national central banks. National Central Banks with control of their own currencies cannot go bankrupt. The normal accounting and business rules simply don’t apply. So that is not an issue, at least not one that is a dealbreaker and a reason to stay.
Redenomination risk of existing assets and liabilities is a problem. Irish assets and liabilities would shrink as the Punt Nua would be discounted versus the Euro, while the Neue Deutsche Mark assets and liabilities would rise. But a solution here might be to have a parallel currency, whereby existing assets and liabilities remain in Euros and all new transactions happen in the new currencies.
Legal and technical barriers may be a bigger obstacle. But laws can be amended and computers reprogrammed. The American economist Barry Eichengreen feels that these barriers may be the biggest to euro breakup. I disagree
The biggest barrier is political. Part of this is the inveterate need of politicians to be right, even when wrong. No politician easily admits error. Another part is the genuine sense that so much political capital has been poured into the Eurozone that to walk away would be folly. This is however a political sunk cost fallacy. The capital has been expended and cant be gotten back. To save face, lets not call this a Eurozone breakup but a rollback.
I am not advocating Ireland “leave the euro”. We cant do a solo run. What we can do is offer to start work on the rollback. The northern Ireland peace process required technical work for years, then a situation of trust amongst the distrustful, where all jumped together. We have the political DNA to carry this out. What we lack is the political spine
A column in The Irish Examiner examines this