THE route for euro exit that I recommend requires the prior formation of a secret (and deniable) task force by either Germany alone, or (possibly) with France as a junior partner.
This task force should develop a plan in which the first euro exit is the only one – with the complete abandonment of the euro when it becomes inevitable that one member is to leave.
I have reached this radical conclusion – with much reluctance – because the moment one country leaves the euro, then the currency is no longer unbreakable.
It may be that no country leaves the euro in the near future, and the task force plan would stay locked in a vault. However, if it becomes apparent that the exit of one country is inevitable, then the task force plan could be activated.
If it comes to pass, Germany would propose at an emergency meeting of the Council of Ministers (on a Friday, after the markets have closed) that the euro should cease to exist with immediate effect, to be replaced by 17 new national currencies. The European Central Bank (ECB) would be closed and its functions terminated with immediate effect. All its functions would be transferred to the relevant national central banks (NCB). Its balance sheet would be shared out pro-rata to NCBs by reference to the ECB capital key percentage (the national shareholding proportions) and for banknotes, each NCB banknote issue.
To prevent uncertainty and panic moving of assets, Germany would seek agreement for currency redenomination to depend only on immoveable reference points. As an example, this would mean a bank account physically located in France on the day of the announcement would be redenominated into the new French currency, irrespective of the nationality of the account holder. Mortgages would be treated slightly differently – they would be redenominated into the currency of the country where the mortgaged property resides. Sovereign debt would be redenominated into the issuers’ new national currency.
Banknotes and coins would cease to be euros, and would become fractional denominations of their issuer’s new national currency, identified by their national serial number prefix (or for coins, their obverse side). Their value would depend only on the identity of the national issuer, not on the owner or the location. Countries would immediately embark on new national banknote printing and new coin minting programmes. Exchanging euro banknotes of different national issuers would be permitted, but would be foreign exchange transactions, conducted at whatever price the market sets.
The immediate effect of this cataclysmic change would be felt most powerfully in two constituencies – the financial sector and exporting industries. The banking sectors of the stronger countries would be very badly damaged by redenomination, and would undoubtedly need rescuing by their respective national governments. The banking sectors of the weaker countries would be much less badly hit, and may even experience windfall gains (depending on exact redenomination provisions). The ECB’s balance sheet would be hit very hard. As the major recycler of funding from north to south, it would suffer very large losses in the redenomination, and each national government would be required to make good the loss in proportion to their capital key percentage (share of ECB capital). Redenomination of euro derivative transactions would be complicated, but policymakers and legal systems should aim for speed and certainty.
Exporting sectors of stronger countries would suffer a loss of competitiveness, while those of the weaker countries would see a very sharp improvement in their competitiveness. Together with interest rates and exchange rates that would attract capital to the south, southern funding needs would once again be provided by private capital.
I believe it is possible for the complete abandonment of the euro to be a turning point in the cycle of crises which have characterised the Eurozone in the past few years. Indeed, despite the momentous scale of the event itself, exit could mark the start of a new and vibrant period in Europe’s history.
Neil Record is chairman of Record and visiting fellow at Nuffield College, Oxford. He is a finalist for the £250,000 Wolfson Economics Prize, the second-largest academic cash award after the Nobel Prize.