Winding Down The Eurozone

I write this realizing that the dominant reaction might be, “That won’t work.”  Well, I toss out ideas on things like this because they *might* work, amid a situation where things are ugly, and real solutions aren’t appearing. If you explain to me why it won’t work, that will help me do better in the future. I don’t respond to all comments due to time constraints, but I do read all comments and I consider them.

We have a lot of problems in the world today, but the one that is the most volatile at present is the eurozone. The eurozone has issues, because tries to have one currency across an area where levels of productivity, retirement policy, regulatory policy, etc., vary considerably.

The goals of having an “ever-closer union” are perhaps desirable, if naive. Two can only walk together if they agree on underlying issues — with 17 nations, it is far tougher.

The first step toward a solution, given that all nations have fiat currencies, is to acknowledge that you made a mistake in creating the eurozone. If you are going to have a fiat currency, you should have some form of taxation authority behind it, and that is not true in the eurozone.

The second step is to re-introduce individual currencies for each country in the eurozone. A euro would be defined as a weighted average  of the individual currencies in the euro; the initial weights would stem from the percentage of GDP for the eurozone as a whole. Local currencies would be used for local transactions, but the trade in currencies and euro arbitrage would result in changes in the trading values of the local currencies. Quarterly, the value of a euro relative to the local currencies would be redefined by the percentage of GDP the country has compared to the whole of the eurozone.

The third step is dealing with bankrupt nations. Solvent nations should not bail out bankrupt nations, but instead, bail out local financial institutions with assets from bankrupt nations the right way — wipe out common and preferred shareholders, and junior debtholders, and make senior debtholders take a haircut. Protect depositors, but others in the capital structure lose.

Fourth, when things have normalized, take euros, and force an exchange into the underlying currencies. The eurozone is gone, and all of the problems that it created. Send the eurozone to the ash-heap of other currency unions; they don’t work.

There will be some complexity here, but the need to undo a major policy error — creating a common currency when there is not a common government, is a significant matter, and the effort to unwind the mess should be pursued.

And now, you can tell me why this won’t work.