Steve Keen's Proposal for "Sub-Euros" and "an SDR of Europe"

Markets around the globe rallied following Mario Draghi’s statement that he would “do ‘whatever it takes’ to protect the euro zone from collapse.” Unfortunately, for market/Europe optimists, this statement was not accompanied by any specific forthcoming policy action or timeline for action. While open-mouth operations continue to scare the shorts and offer a short-term boost, the spike in optimism will once again be short-lived as growth concerns soon return to the fore.

Over the past couple years, I’ve remained pessimistic about the potential for a United States of Europe. Instead, I continue to believe that the EMU will eventually break-up but remain hopeful that free trade and labor mobility will persist. During this time, I’ve tried to highlight various proposals for solutions to the crisis that appeared both reasonable and feasible. Drawing from the work of Keynes, Friedman and Godley, Steve Keen offers a new proposal that re-institutes national currencies while maintaining the Euro as an SDR of Europe:

Some see the way out of today’s catastrophe as creating what does not exist—the United States of Europe. But if that were ever a possibility, it is far less one after the damage done by Maastricht, and the Franco-German insistence on austerity for the periphery in this crisis. However what is a possibility—and which has echoes in some of the contributions here (such as “Nau” proposal from Gerald Holtham)—is to move the Euro closer to a continental version of Special Drawing Rights.

The Euro could be the currency of inter-European and international trade, while “sub-Euros” created by each of the nations of Europe could be used for domestic trade and, importantly, domestic financial arrangements. The disciplinary aspects of Maastricht—which are currently inappropriately directed at government deficits and are amplifying the downturn—would then be redirected at trade deficits within Europe instead (and matched by pressures to minimize intra-European trade surpluses as well).

The Euro-Drachma, Euro-Peso and Euro-Mark could be introduced at one-to-one parity with the Euro, and all financial assets and liabilities would be denominated in these national currencies rather than the Euro. These national currencies would then float freely for a period (say one year), after which they would be fixed in proportion to the Euro.

The obvious devaluation that would occur for the Euro-Drachma and Euro-Peseta would reduce their foreign debts—and force the nations whose banks over-lent to them to deal with the consequences. It would also end the currency flight that is currently occurring: a Euro-drachma would still be a Euro-Drachma, whether it resided in a Greek or German bank account.

The introduction of such a system could provide a rapid resolution to the current crisis. It could not be pain free, but it would be difficult to imagine that it would impose more pain than is currently being felt by Greece and Spain, or is about to be felt by other countries once the contagion passes on to them.

This system would also introduce what is otherwise impossible in the Euro: exchange-rate flexibility. Economists as widely apart ideologically as Wynne Godley and Milton Friedman observed long before the Euro began that it would fail (a) because it imagined that a market economy would reach a harmonious equilibrium on its own without government intervention—which Godley correctly characterized as a deluded neoclassical fantasy; and (b) because it pushed together widely disparate nations which Friedman noted were utterly unsuited to a currency union.

A step backwards by Europe from dystopian fantastical object of a single currency, to a mini-version of what Bretton Woods should have been, could thus be a workable way out of this crisis and towards the political dream of a non-fractious Europe.