Oct 1, 2012
Center for Democracy and Civil Society

Leaving the Euro: A Practical Guide

Explain again, mr. Draghi, how you can save the euro

As our next edition of the Democracy & Society journal focuses on politics of the economic crisis, I have been paying attention to everything that could be a good topic for analysis, and I just read about a report that could be a great starting point for a paper. It’s economist Roger Bootle’s “Leaving the euro: A practical guide”. He imagines something like this:

It’s Friday in Madrid. After a secret meeting, the prime-minister and his cabinet organized an announcement that stopped the entire country in its tracks: As of 12:01AM Monday, wages, pensions and prices will be reset in pesetas at a 1-to-1 ratio with the euro. Over the weekend, bank branches, electronic transfers and ATMs would stop working, so that no one can transfer money out of the country. That’s right, world, Spain is saying goodbye to the euro in dramatic fashion.

The British economist, whose crystal ball forecasted the end of the dotcom bubble and the crash of the housing market, says that fictional day will inevitably become a reality for all the weakest European countries, and the sooner the better. “The euro is a depression-making machine”, he said in a recent interview with Fortune magazine, shortly after winning the prestigious Wolfson Economics Prize for his manual.

It seems that Mario Draghi, chief of the European Central Bank, is rapidly becoming the leader of a minority current. He is the one who stated that the “euro is irreversible”, shortly after announcing in September a huge program for buying the sovereign debt of the weakest neighboring nations. According to Bootle and to more and more economists, at least a partial break-up of the euro will happen no matter what, and politicians who argue for its survival as it is are simply buying time (at an enormous cost). That is, unless Germany and other big nations take steps to create shared debt and fiscal unity, which would be difficult to achieve, politically.

Bootle does not seem to even consider that option. He says that the currency will likely break slowly over the next few years, bringing severe hardship to everybody. He takes two main threats to the union into account: one is, obviously, the large public debt, of over 100% of GDP, in nations such as Greece and Italy. The other, and more important one, is the loss of competitiveness created by excessive production costs –the economist estimates that the competitiveness gap is 30% to 40% for the weak versus the core nations.

To get out of that hole, he proposes breaking up the common currency now, in a controlled way. And he has a sound point. Bootle notes that if countries remain in the euro zone, they will have little choice but to try to restore competitiveness through more austerity: letting high unemployment grind down wages, raising taxes and slashing public expenditure.  That would not only take too long (he says at least ten years), but from where I stand is no guarantee of future growth. What is more, so far it has been a recipe for turmoil, both political and economic, with serious doubts about how much more Greeks, Portuguese and others can take.

If they leave now, affirms the economist, they can let their currencies naturally devalue (the projections are 55% for Greece and Portugal, 40% for Spain and Italy, and 25% for Ireland) and win an almost immediate competitive edge. They can also re-denominate their sovereign bonds in local currencies. That amounts to a default, considering how much creditors would lose, but Bootle says the value of the bonds is fictional anyway.

“The departing nations would suffer several months of declining growth and rising unemployment. World stock markets would swoon. But just as occurred in Argentina after its currency was devalued a decade ago, the economies would start growing again within a year, driven by strength in exports.”

Now wouldn’t examining that in a deeper way be a great paper.



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Founded in 2004, Democracy and Society is a biannual print journal published by the Center for Democracy and Civil Society at Georgetown University. The D&S Blog provides web-only content, including special reports and investigative series, on issues relating to democracy and development.

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