IF YOU were stuck in a burning building with no exits, what would you do? You could try to put out the fire, or try to dig an escape route. When Europe’s leaders gather this weekend, they are going to spend their time trying to get the fire extinguishers to work to quell the euro firestorm. Which will leave them with a big problem if they don’t succeed – because they won’t have thought about how to manage a country escaping the euro in a way that causes the minimum chaos.
This is the point of the Wolfson Economic Prize, announced yesterday. The world’s second biggest economics prize, at £250,000, is aimed at getting the best brains thinking about the best way to manage one or more countries leaving the euro before it is too late. Normally this is something you would expect the finance ministries of Europe to do, but the slightest whiff that they are preparing for Greece’s departure from the euro could precipitate the very crisis they are trying so desperately to avoid.
For many of Europe’s political leaders, the breakup of the euro is so unthinkable they simply aren’t thinking about. But I suspect behind closed doors there are pragmatists in various German financial institutions that are considering the challenge they might well soon face.
Certainly many economists have idly speculated about what might be involved. A Greek departure would probably lead to devastating capital flight from Greece, devaluation of over 50 per cent, the wiping out of the life-savings of swathes of the population, the bankrupting of Greek mortgage holders of non-Greek euro mortgages, and the chaos of existing business contracts being rendered meaningless.
And that’s just the predictable stuff. The breakup of currency unions can be a very messy business. The collapse of the Soviet Union led the rouble to splinter into a dozen currencies, and initiated a series of civil wars. The dismemberment of the Austro-Hungarian empire after the First World War led to the abrupt and chaotic introduction of multiple currencies in its constituent parts. When Argentina broke off the peg with the US dollar in 1992, it caused short-term economic devastation – although once it had taken the punishment, Argentina was soon on the road to recovery.
But history shows us that with stable politics, the breakup of currency unions doesn’t have to be devastating. The abandonment of the Scandinavian currency union in 1931 was a predictably Scandinavian affair. Slovakia quickly got over its monetary split from the Czech Republic. When the Irish pound divorced from the pound sterling in 1979, most people barely noticed.
This time, political circumstances are different, the economic strains particularly pronounced, and financial systems have changed beyond recognition. But it is vital we learn the lessons from history as much as possible. The launch of the euro was an unprecedented logistical exercise that was flawlessly smooth only because of extraordinarily meticulous planning. Without planning, the breakup of the euro would be far from smooth. The Wolfson prize might seem like a lot of money at £250,000. But if it helps avert financial chaos in Europe, it could be one of the best investments ever made.
Anthony Browne is the former director of the leading think tank Policy Exchange. firstname.lastname@example.org