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THE LAZARUS OPTION: REVIVING OLD CURRENCIES WHILE KEEPING THE EURO by Francesco M Bongiovanni

 

The fragility and flaws of the single currency construct are obvious from the fact that Greece, which represented only 2.3% of Eurozone GDP, threatens to bring it down and nobody knows where it is all going to end. The socio-economic model adopted by most European countries with its absurd rigidities anchored in the "Civilization of Entitlements" became unsustainable and uncompetitive in today's world yet Europeans continued to live beyond their means by piling up debt. The American-born subprime crisis acted as a catalyst, accelerating the time of reckoning by forcing markets to take a closer look at things. Troubled countries now find themselves saddled with unbearable amounts of debt which their economies can't realistically be expected to repay. At the same time they are prisoners of a currency that is grossly overvalued with respect to their own economies, hurting exports, growth and jobs, and the panacea of competitive
devaluations is not available to them anymore. The crisis having been misdiagnosed as a purely fiscal one, brutal austerity measures are now putting what is left of these troubled economies on their knees. Massive social unrest maybe around the corner as people are forced to sacrifice more and more without the benefit of a glimmer of hope. The tragic irony is that the single currency which was supposed to be the final glue holding Europe together threatens instead to blow it apart.

The Euro being a political construct that didn't stem from any economic imperative, any final solution to the crisis will have to be political. Solutions such as the mutualization of debt, a banking union, increasing the firepower of bailout mechanisms don't go far enough or translate in the likes of Germany having to pick up the bills for the foreseeable future, something the Germans won't condone (and why should they?). Similarly the likes of Greece won't accept having to live in hell forever in order to repay foreigners. The combination of bold moves recently undertaken by the ECB with the coming into existence of the ESM may go a long way towards stabilizing markets in the short term but they do not constitute a solution to the crisis. Closer monetary integration is not politically achievable at a time when the crisis divides Europeans
more than ever and the political leadership remains consistently behind the curve. It is thus check mate, except that as the clock ticks doomsday scenarios become more plausible.

A troubled Eurozone country can't print Euros but can still revive its own currency and let it float, undoubtedly ending at a substantial discount from the Euro. Both currencies could exist alongside as legal tender with businesses and people having the option to use either for commercial transactions. Exporters could quote their goods in cheaper local currency, regaining some competitiveness. The government could pay for a substantial portion of its expenditures including salaries and pensions in local currency, reducing by the same token the need to finance itself in Euros in the markets. It could also issue local currency IOUs. Barring eventual debt restructuring, Euro-denominated sovereign and private debt would, however, still all be there and need to be repaid with more expensive Euros, a painful yet unavoidable side effect. For the sole purpose of repaying Euro-denominated debts with local currency, an official exchange rate between the Euro and the local currency would need to be fixed with the ECB, with strict controls over such operations and capital flows and to prevent speculative arbitrage. The revived old currency would effectively be made of two components a commercial currency and a financial currency. Euro creditors would undoubtedly suffer too and reintroducing the local currency may to some extent be considered as a "soft default", albeit one carrying less uncertainty. In order to prevent a run on local banks
by customers holding Euro deposits, these deposits may need to be repaid (and remunerated) in Euro as if the local currency had not been reintroduced, a measure that is likely to require assistance from the Eurozone. A gradual and partial phasing out of the Euro may naturally occur in the economy, unless, ideally, a fully-recovered economy opts for the Euro.

There have been examples of dual-currency economies, yet implementing multiple exchange rate mechanisms within the Eurozone carries risks and is no simple matter. While it would alleviate some of the pressure on troubled countries, it is no silver bullet. The Eurozone crisis would still be with us and nothing will change the fundamental reality that European economies have very little chance of converging and that the model Southern European countries in particular cling to is broken. Yet if maintaining the integrity of the monetary union is a condition necessary to avoid turning the clock back on seven decades of integration (which, after all, brought peace and prosperity to a continent which has mostly been a conflict zone for millennia) and if troubled countries are to be given a chance, unconventional options such as running old
currencies alongside the Euro deserve serious consideration, and sooner rather than later.