Monday, May 28, 2012

Ending the Euro Currency, Not the European Union

For the last three years Europe’s politicians have promised to “do whatever it takes” to save the euro.  It is now clear that this promise is beyond their capacity to keep – because it requires steps that are unacceptable to their electorates.  No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end.
Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF’s leadership are already covering their tracks, implying that corruption and those “Greeks not paying taxes” caused it all to fail.  This is wrong:  the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also.  Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery.  We cannot blame corrupt Greek politicians for all that.
It is time for European and IMF officials, with support from the US and others, to work on how to dismantle the euro area.  While no dissolution will be truly orderly, there are means to reduce the chaos.  Many technical, legal, and financial market issues could be worked out in advance.  We need plans to deal with: the introduction of new currencies, multiple sovereign defaults, recapitalization of banks and insurance groups, and divvying up the assets and liabilities of the euro system.  Some nations will soon need foreign reserves to backstop their new currencies.  Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.
Read it at The Baseline Scenario
The End Of The Euro: A Survivor’s Guide
By Peter Boone and Simon Johnson

The last sentence requires special attention. Much of the discussion today regarding a dissolution of the EMU seems to imply that free trade and labor mobility must rapidly decline. As frustrations between and within nations are allowed to grow, this outcome may prove true but it need not. The benefits from free trade and labor mobility in the EU are significant regardless of whether any single currency exists. If that were not the case, then why are some countries part of the EU but not the EMU?

In politics it often appears that planning for unthinkable outcomes is considered a sign of expected failure. Confidence, however, cannot solve all problems. Unthinkable outcomes still happen frequently enough and the repercussions are far greater than necessary. Even if the politicians will not make their contingency plans publicly known, one has to hope those plans are being thoroughly discussed in the background. An end to the Euro currency will be troublesome, but an end to the EU will be disastrous.

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