Jens and his colleague Nick Firoozye argue the treatment of foreign law debt contracts is of crucial importance because there is around €10 trillion outstanding. Their essay says debt contracts falling under national or local law should be redenominated into a new currency, while debt contracts falling under foreign law should be redenominated into a new European Currency Unit. He thinks an open discussion of the process will calm, rather than panic, markets – “knowing nothing about what happens to assets after a break-up is often worse than not talking about it,” he told City A.M.
Record Currency Management
Former Bank of England economist Neil Record argues that if any country leaves the euro, the entire euro must be dissolved. He writes that the moment one country leaves the euro, the view that the currency union is “permanent” becomes untenable, giving markets the ammunition to undermine structural weaknesses elsewhere. Record’s focus is administrative, and he advocates the establishment of a secret Franco-German committee which would set out a detailed week-by-week timetable for the break-up, including the return of powers to national central banks.
Former NatWest and Gartmore analyst Catherine Dobbs proposes the creation of new currencies, with each country allocated balances based on the stock of money held in each of the countries in the new currency areas. She hopes the scheme would disincentivise capital flight and reduce defaults. Indeed, if the plan was adopted she believes it would reduce capital flight, increasing the Eurozone’s stability and so making a break-up less likely. Her aim to reverse the process by which the Eurozone was created was praised as “original, insightful, elegant and persuasive” by the judging panel.
Roger Bootle and his team focused on competitiveness, which he believes is the main problem – “debt and deficits are just the symptoms.” Their focus is how to achieve a fall in real wages and prices with the minimum disruption. They propose government and consumer debt be redenominated deploying the “lex monetae” principle – in other words, that each country determines the currency applicable under its laws. However, it proposes leaving corporate contracts to be determined by courts (in a few cases contracts will be interpreted in terms of national currency; in most in the euro).
Author, research group editor and hedge fund portfolio manager Jonathan Tepper contends that currency exits and devaluations are often expected to lead to “Armageddon” but rarely do. Looking to other examples of countries leaving currency unions in the past, he argues it should not be too difficult for a country to exit the Eurozone over a weekend, perhaps with a few extra bank holidays. His paper argues that the real issues are not created by the exit process itself, but by the needs that motivate the exit — the need for Eurozone periphery countries to default and devalue.