The sooner the better for the euro's endgame
The pain of keeping the eurozone together is too much. The sooner the peripheral countries go their own ways, the better for everyone involved.
An email arrives from Terry Smith. Like me, he has long thought that a breakup of the euro would be a total disaster something that would create such chaos and so many dominoing disasters that all efforts to avoid it (although doomed to failure in the end) have some value.
Like me, he is beginning to change his mind. The pain of keeping the zone together and forcing the peripherals to devalue internally when we all know that they will have to default and devalue in the end is just too much.
So, the sooner we reach the endgame for the euro, the better. Smith has forwarded a piece from Variant Perception on the subject. You can read the whole thing here - and you probably should.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The point it makes is that, over the last century, 69 countries have exited currency areas. Think the Austro-Hungarian Empire in 1919; Pakistan and Bangladesh in 1971; the USSR in 1992; Russia in 1998; Argentina in 2002. They've also mostly done so "with little downwards volatility".
In almost all cases, real GDP declined for only two to four quarters. "Furthermore, real GDP levels rebounded to pre-crisis levels within two to three years and most countries were able to access international debt markets quickly."
This all gives us something of a roadmap for dealing with our own crisis. How do we deal with the timing and announcement of exits, the introduction of new coins and notes, the denomination or re-denomination of private and public liabilities, and the division of central bank assets and liabilities? We look to history and see what worked for everyone else and what didn't.
"While every exit from a currency area is unique, exits share a few elements in common. Typically, before old notes and coins can be withdrawn, they are stamped in ink or a physical stamp is placed on them, and old unstamped notes are no longer legal tender.
"In the meantime, new notes are quickly printed. Capital controls are imposed at borders in order to prevent unstamped notes from leaving the country. Despite capital controls, old notes will inevitably escape the country and be deposited elsewhere as citizens pursue an economic advantage.
"Once new notes are available, old stamped notes are de-monetised and are no longer legal tender. This entire process has typically been accomplished in a few months," says Jonathan Tepper, the author of the report. He then goes on to make 13 specific recommendations for a euro exit. This is clearly going to be a complicated business given just how many countries are involved. But it might not have to be quite as chaotic for quite as long as most people think.
The real problem in Europe, as Tepper puts it, is that "EU peripheral countries face severe, unsustainable imbalances in real effective exchange rates and external debt levels that are higher than most previous emerging-market crises. The only way out of this is via orderly defaults and debt rescheduling coupled with devaluations".
Defaults are only a partial solution in that they might leave the countries with less debt, but they'll also leave them stuck with overvalued currencies that will keep building up imbalances. That makes default and devaluation both "inevitable and even desirable".
The combination would of course cause sudden pain to creditors everywhere, but the hard truth is that their losses already exist. It is just a matter of whether they are crystallised now or later. The upshot? Getting out now something Greece and Portugal should definitely do and Spain and Ireland should seriously consider would mean that the pain of devaluation would be "brief, and rapid growth and recovery would follow".
subscribe to MoneyWeek magazine will know that I have just been in Portugal and that there, the pain is being drawn out in a particularly nasty way. The same goes for Greece, where the human cost of internal devaluation via the labour market is mounting.
It is unlikely that the EU authorities will want to do anything drastic before the French elections. But once those are over, it is time to help Greece and Portugal cut themselves loose.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Investors pull money from UK equities as government warns of “painful” Budget
The government’s post-election honeymoon period has been short-lived, and investors are shying away from UK equities as a result
By Katie Williams Published
-
Top global fintech companies to invest in
One British fintech hogs the headlines, but there are two top performers in the US. We explain where you should put your money
By David C. Stevenson Published
-
Beating inflation takes more luck than skill – but are we about to get lucky?
Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
By Merryn Somerset Webb Published
-
Rishi Sunak can’t fix all our problems – so why try?
Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
By Merryn Somerset Webb Published
-
Young people are becoming a scarce resource – we should value them more highly
Opinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Ask for a pay rise – everyone else is
Opinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
By Merryn Somerset Webb Published
-
Why central banks should stick to controlling inflation
Opinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
How St Ives became St Tropez as the recovery drives prices sky high
Opinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
By Merryn Somerset Webb Published
-
The real problem of Universal Basic Income (UBI)
Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
By Merryn Somerset Webb Published
-
Why an ageing population is not necessarily the disaster many people think it is
Opinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
By Merryn Somerset Webb Published