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How do you leave the euro?

Kathleen Brooks, Director of Research UK,

The question was posed by Lord Wolfson, chief executive of Next, late last year. It was one no one thought to ask 12 years ago and one that could win you £250,000 if you got it right. So how could a country actually leave the euro?

Little did Lord Wolfson know that the answers he would receive would include pizza similes and egg yolks.

The finalists to his competition include a team of economists from Capital Economics, a female private investor, some strategists from Nomura, a former Bank of England official who is a now a currency manager and an economist from Variant Perception, a research house.

They had to produce between 15,000 and 25,000 words to stand a chance of winning £250,000, the second most generous economics prize after the Nobel Prize.

However, a much shorter entry from a 10-year old Dutch boy, Jurre Hermans, was given a special mention. He was the youngest entrant and received €100 (£83) in vouchers (it wasn’t known if they were for Next).

Hermans argued that Greek people should exchange their euros for drachma at their local banks. The banks should then give all of these euros to the Greek government who form a money “pizza”, slices of which are then used to pay back Greece’s creditors.

Obviously Hermans has spent too much time playing with his friends to know that the Greeks don’t even like to pay taxes on their swimming pools, let alone incomes, and so the chances of them giving back all of their euros to the banks, even under threat of a penalty of 100% of the amount of money they have tried to hide, is unlikely to work.

However, for originality and simplicity of thought Hermans well deserved his prize.

[Related story: How a Dutch boy would solve the problem]

Secrecy, bank holidays and rubber stamps: How the experts would do it

The team led by Roger Bootle at Capital Economics didn’t mention pizza but did say that the most realistic scenario for a eurozone break-up is for a weaker member to leave. However, they stress that preparations must be made in secret and there should only be a short time frame from announcement to implementation.

Once a member leaves, the euro should be replaced with, say, the drachma. However, people would be able to use their euro for smaller transactions for a certain period of time to prevent panic and the freezing up of the economy.

The new currency would drop in value dramatically, between 30-50%, according to Bootle. The government would need to re-denominate its debts into its new currency leading to a substantial default. This would reduce the debt-to-GDP ratio to more sustainable levels allowing the government in question to then go about paying back the rest of its debts.

It wouldn’t just be the weaker states that need to adapt, add Bootle and co. If a Greece, Portugal etc. had a weak currency it should concentrate on its export sector, while the richer states should concentrate on becoming centres of demand to help boost growth in former members’ economies.

[Related story: Roger Bootle’s plan in detail]

Neil Record (the former Bank of England official) said that Germany and France should manage the break-up of the eurozone and return to national currencies. He also suggests a logical way to re-value national currencies: use the rate at which they entered the euro, in Greece’s case this would be 340.7 drachma per euro. 

He also helpfully adds a timetable for implementation. Firstly, a special meeting is called on a Friday, then there is an announcement of the termination of the eurozone on the Saturday, after that a two-day bank holiday is announced for the following week, which would allow the banks to prepare for re-opening under a new currency on the Wednesday.

Add in some tweaking here and there and you have the end of the eurozone.

[Related feature: What would actually happen if the UK left the EU]

Jonathan Tepper from Variant Perception goes down a similar route as Record; however he thinks that “old” euro notes should be stamped with the appropriate symbol to give the countries time to produce enough of their own currencies. He also adds that the collapse of a currency union is not necessarily the Armageddon some people may think.

The team from Nomura concentrate on how euro-based assets and obligations would be re-denominated in the event of a break-up and what their legal standing would be if the eurozone failed to exist.

They also argue that a new European Currency Unit should be created to help the re-denomination process for assets issued under foreign law. Thanks to the globalisation of the financial system, countries in the currency bloc have both government and private debt that is issued under foreign laws, which makes this break-up particularly tricky. 

The Nomura entry is very heavy on detail, but it raises an important point: How can governments/ individuals protect themselves from the risks of their new currencies. This is important as the break-up of the currency bloc would most likely cause some major currency volatility. Such forethought is likely to impress the judges when they come to picking the eventual winner.

Last but not least is Catherine Dobbs who proposes the “NEWNEY approach to unscrambling the euro”.  Dobbs’ is a novel approach: Treat each euro equally and rather than install domestic currencies, instead give every country that leaves a basket of currencies to return to.

[Related feature: Should we all just print our own money?]

The egg analogy is used to differentiate between those countries that stay in the eurozone (the egg white) – most likely the countries that are strong and competitive – and those that leave the eurozone (the yolk), most likely the uncompetitive countries who are financially weak.

NEWNEY stands for “New euro-white” – the currency of the countries that stay in the union and “New euro yolk”, the currency of those that leave. The “yolk” countries would gradually see a devaluation of their currencies that would occur through higher nominal interest rates, which would allow “the start of a process of restoring competitiveness in the Yolk countries”, writes Dobbs.

Ultimately, Dobbs’ plan could be attractive to European authorities because it would make what she calls “destabilising speculation” and thus mass capital flight in the event that a country leaves the currency bloc, less likely, which may appeal to European authorities.

The judges have their work cut out between now and July when the winner is announced.  Between pizzas, eggs and number crunching the finalists of the 2012 Wolfson Economics Prize have made the break-up of the eurozone a little easier to visualise and a little more real since pressing the send buttons on their submissions.

[Related feature: 2012 - the year of the pound]

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