A Bonzer Wheeze, by Martin Feldstein

In today’s FT, Feldstein has spotted the obvious easy way out. Briefly, Greece should be allowed to leave the Eurozone temporarily, devalue, and rejoin. The drachma would start at one-for-one to the €, then fall (quickly!) to 1.3, at which point it would re-adopt the €. Greece would be competitive again. The only snag is that, as he puts it, ‘…other Eurozone members might object to giving Greece this improved competitiveness.’

In fairness therefore, everyone else would have to be given the same option.

Perhaps there could be an appointed day, once a year, when everybody could step out, as in Lanigan’s Ball, and then step in again, as soon as the competitiveness gain seemed adequate.

In the dollar zone, the lack of competitiveness in eg Michigan could be dealt with in the same way.

And thus the whole world could participate, with confidence, in sub-optimal currency areas, without fiscal discipline. I so wish I had thought of this.  

With one brave bound…..

51 replies on “A Bonzer Wheeze, by Martin Feldstein”

@Colm McCarthy

Feldstein is hopping balls … suffering from overload.

On another matter closer to home – I’ve seen your name mentioned as supporting the raid on the National Pension Reserve Fund to supplement the kitties of the Irish Banks. If any truth in this rumour – as a citizen stakeholder in this Fund – I would welcome a substantive comment from you on this.

In the dollar zone, the lack of competitiveness in eg Michigan could be dealt with in the same way.
A more correct comparison would be to liken Cork (for example) to leaving the old punt zone. U.S. states and European countries are not exactly the same thing, even if some Euro countries share a currency.

@ Colm

Could Feldsteins plan work? How would you determine the re entry rate for each member that wishes to avail of the option? And how do you know countries are telling the truth about their fiscal position, considering we know that it is not beyond member states to cook the books?

No, it couldn’t work. Krugman blogs on this today. He quotes Eichengreen (which relates to a previous thread on this site):

The insurmountable obstacle to exit is neither economic nor political, then, but procedural. Reintroducing the national currency would require essentially all contracts – including those governing wages, bank deposits, bonds, mortgages, taxes, and most everything else – to be redenominated in the domestic currency. The legislature could pass a law requiring banks, firms, households and governments to redenominate their contracts in this manner. But in a democracy this decision would have to be preceded by very extensive discussion.
And for it to be executed smoothly, it would have to be accompanied by detailed planning. Computers will have to be reprogrammed. Vending machines will have to be modified. Payment machines will have to be serviced to prevent motorists from being trapped in subterranean parking garages. Notes and coins will have to be positioned around the country. One need only recall the extensive planning that preceded the introduction of the physical euro.

Back then, however, there was little reason to expect changes in exchange rates during the run-up and hence little incentive for currency speculation … In contrast, if a participating member state now decided to leave the euro area …the very motivation for leaving would be to change the parity.

Market participants would be aware of this fact. Households and firms anticipating that domestic deposits would be redenominated into the lira, which would then lose value against the euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond-market crisis. If the precipitating factor was parliamentary debate over abandoning the lira, it would be unlikely that the ECB would provide extensive lender-of-last-resort support. And if the government was already in a weak fiscal position, it would not be able to borrow to bail out the banks and buy back its debt. This would be the mother of all financial crises.

“And I never said that the Euro would lead to war within Europe or with the United States.”
– – Feldstein in 2009


This is what he wrote in 1997:

“The American experience with the secession of the South may contain some lessons about the danger of a treaty or constitution that has no exits.”

“War within Europe itself would be abhorrent but not impossible. The conflicts over economic policies and interference with national sovereignty could reinforce long-standing animosities based on history, nationality, and religion. Germany’s assertion that it needs to be contained in a larger European political entity is itself a warning. Would such a structure contain Germany, or tempt it to exercise hegemonic leadership?”

EMU and International Conflict


David McWilliams has made a similar suggestion to Feldstein i.e that Ireland should temporarily leave the Eurozone and later reapply for entry – – it’s interesting how beggar-my-neighbour proposals still have traction.

Ireland has the best of both world’s for its crucial foreign-owned sector: low and zero taxes coupled with currency stability within a large tarding area.

Viewing the world from the comfort of an armchair, is always easier than the réalité.

I guess Feldstein’s contribution to the FT is motivated by a sense that he was right a decade ago but despite some obvious flaws, he wasn’t!

It’s as simple as this; you would see a large draw out from Countries in the Euro and very few participating again.

A plan like this would completely dissolve the Euro.

Worst idea ever.


we would probably require a referendum to change the constitution as well?

Such a process as you describe would require an adroitness and flexibility unknown in the Irish public service and body politic. Moreover, do not rule out senior pols in a certain political party front running the decision just as a cetain notorious MOF here did pior to the Wilson Govt devaluation of Sterling.

Our membership of the Euro is like 1950s Catholic marraige.

I guess it would be much simpler to reduce all wages by 20%? You end up in pretty much the same place? Almost impossible to contemplate but more practical, relatively speaking, than an exit?

What would this even mean in practice? I mean the stock of money in Greece is held (mostly) by private agents. How do you separate out “Greek Euro” from “Real Euro”. Who would change their money into Drachma knowing that it would immediately lose value. Surely it is impossible to prevent a massive run of money out of Greece.

Its obvious how to make many currencies into one but going the other way seems like trying to unbake a cake? Have I missed something here or this a case of a good economist with a ridiculous idea?

@ simpleton

True, and you omit one key point.

With such a well signaled devaluation, who would leave their money in the banks simply to await its devaluation.

Banks would collapse, people would lose everything, money would flee the country, the new drachma would have little more than olives as backing.

The scariest part of the article comes at the end:
The writer is professor of economics at Harvard and president emeritus of the National Bureau of Economic Research. He chaired the Council of Economic Advisers under President Reagan and is a member of President Obama’s Economic Recovery Advisory Board

@Colm – in a comment to another thread I suggested something more dramatic that would amount to the same thing “What if the elected government were replaced by one that is not” & “They could bring in the IMF clean up the mess and get back into the EU”.

Given what Eichel said today, and that appears to be a widely held view in Germany, there is no re-admittance to the Euro if Greece were to leave. It is also not going to be painless to exit the currency union.

In any case competitiveness is not the issue since Greece is the most closed economy in Europe – they have nothing to sell so they can’t trade their way out of the mess. How is a devaluation going to help deal with their foreign debt?

They have to radically reduce their living standards.

I agree given that Greece is so closed a change of currency won’t fix the problem, it’s almost an attempt to solve an internal problem (mounting debt) with an external solution (currency change).

@consaw – there might be an increase in package holidays but tourism will be down globally so this is not going to amount to that much and remember our friends in Italy, Portugal and Spain will want to be competitive in that market too. I suspect that the demand for olives is fairly inelastic though?

Well, I think this is likely to be such a roraring success that the frequency of “out” days would likely increase to “daily dealing” so to speak.

Allowing economies exchange rate to adjust each day before the problems of assymetric shocks begin to accrue.

It’s so crazy it might just work.

Why not have dual or triple currency? As a citizen I can chose to pay my taxes etc in USD, EUR or IEP…

as Ireland is bankrupt and cannot/should not be allowed borrow more those being paid by the state get paid in IEP.. They can just print as many as they want!

works for me! 🙂

P.S. After all, as a self employed company owner; Ive paid hundreds of thousands over the years in taxes in the full and certain knowledge that should I ever need to claim welfare; I will be treated like a leper by the state which I have contribuited to.

Kevin O’Rourke wrote in the Irish Independent last year: “Devaluation is essentially a confidence trick, and — although some economists are reluctant to admit it — it works.

It works by cutting workers’ wages, not by reducing the amount they see on their pay stub every week or month, but by making the currency they are being paid in less valuable. The result is less expensive labour, and therefore more employment.


Without reform and fiscal discipline, devaluation at best is a short-term fix.
A commodity producer like Argentina (minerals, grain and beef) can benefit because it’s selling into world markets.

The majority of Iceland’s goods exports are from its fish industry.

In Ireland, would cheaper Intel chips exported to other Intel units, rise in demand as the rest of the economy was collapsing?

It’s sometimes claimed that the 10% Irish devaluation in early 1993 resulted in an export boom.

It is of course laughable to make this claim as the big FDI entrants from the late 80s were by then exporting as the US tech boom was gathering pace.

Exports from Irish owned firms post the devaluation hardly changed.

Won’t work, or at least is too painful to be tried more than once in a generation — forget the reprogramming bank computers and ATMs — as the break up of the Soviet rouble zone showed the sudden creation of new currencies tends to redistribute wealth in an unpredictable manner — there is no good answer to the question of should I pay back my debtors now in the old currency, or should I wait for the new currency…

The suggestion is a nonsense.

As endlessly discussed, one or more strong economies could leave and revert to their own currencies or form a Euro Mark 2 (to be commonly called the Mark), but it is procedurally impossible for a weak free market economy to leave the Euro.

Kevin O’Rourke has hit the nail bang on the head when he writes:

“Foreign investors will not hold Irish currency assets if they believe that those assets are soon going to be worth 10pc or 20pc less. Once they start to fear that devaluation may be on the cards, they will pull their money out, and the central bank will lose valuable foreign exchange reserves.”

But, this is exactly what they did believe in late 2007, 2008 and most of 2009, thanks to the likes of David McWilliams and others. The perception is more important than the reality when it comes to currency speculation. Since the global crisis began, McWilliams has been writing on an almost weekly basis that Ireland should/would have to exit the euro and make a massive devaluation. His articles have been invariably quoted at length and with great glee in the anti-Euro UK media the day after he penned them here. The impression gained momentum that Ireland would indeed be forced to exit the Euro and make a massive devaluation. Partly as a result of this, in late 2007, 2008 and most of 2009, capital was flowing out of Ireland. It is only in the past few months that the opening up of a large inflation rate differential between Ireland and the UK, combined with the relatively strong performance of Irish exports in the recession, has undermined the credibility of those claiming that Ireland’s exit from the Euro was likely or inevitable.

Well I suppose one alternative would be to restore internal competitiveness within the eurozone. Rather than force cuts wages and benefits on the periphery (which is difficult), it would be easier to give everyone in the competitive countries a massive pay rise, proportional to their competitive advantage.

This would be clearly bad for the competitiveness of the euro as a whole, so we’d have to engineer a devaluation of the euro too. Perhaps we could do some careful rejigging of the ECB? Maybe put an Irishman in charge of prudential regulation, a Greek in charge of open market operations, an Italian in charge of exchange rate policy…


Hey, before simpleton starts to fire broadsides at me, it’s a less dumb idea than Mr. Feldsteins and he had years of training to get that stupid. I had to work very hard and be self-taughtedly stupid…

🙂 Fair play yogan…. though I prefer my idea of paying public sector in punts. let lenny & the social partners argue amongst themselves over the trinkets…

My alternative idea is to shoot a banker for every billion given to the banks… with a rollover like the lotto every 10 billion or so.. It wont solve anything but sure it wouldn’t do much harm either….

Anyways this jokers idea is equally childish. Sometimes I think economists sit around all day in smoking jackets coming up with ever more preposterous and complex scenarios which work only if the world is populated by stupid people who think exactly like them.

Reminds me of childhood. one child in particular who kept inventing new rules for every game so they could win…. it never ended well!


TBH, I prefer your ideas too. Can I subscribe to your newsletter?

Economics is, to my mind, very like history. Every now and then something happens that proves pretty much all the accepted major stuff wrong while validating some obscure view on how things work. The bandwagon jumps onto the obscure view and it becomes revisionist mainstream. Until the next event horizon.

It is all a bit quantum cosmology – we’d love to explain it to you in common-sense terms, but we’re a little unsure ourselves what they are. If you care to look at these symbols I’ve scratched in the floor with my toenail (they don’t allow pens in here and anyway this jacket doesn’t have much room in the back) it explains it all clearly.

Anyway, it comes down to, in my view, how much do you want the euro to work? How much are you prepared to put up with to make it so? From previous euro-surveys the Greeks and the Italians most miss having their own currencies. The Slovenians regret moving in. The Swedes and Danes would like to have euros to stop random moves by their central banks. I rather suspect that the British could be persuaded to join too and that the trickle of desire will become a torrent if there is another year of expensive Costa holidays.

But all this is a bit moot. In 2005 the French missed the franc and the Germans missed the d-mark:

Where do they sit now? Ask an American (with broadband access and cable television!) how they feel about what “they” are “doing” to the dollar and you’ll get one set of answers. Ask them if they feel that they get value for money based on their earnings (i.e. don’t mention the dollar, the Fed., etc.) and you’ll get another. The bond market is no different. Look at how little it took to move their gaze from us to someone else. Tough measures – the deficit projected to go up this year…

The Germans and Dutch would love this approach. As soon as Greece devalues as suggested bond warriors might short Greek bonds imposing a massive interest rate rise on Greek debt.
An economic ‘Berlin wall’ would corral Greece and prevent their re entry into the Eurozone.
The Greeks ,predictably would revolt and default giving the Germans and Dutch the excuse to cut them loose permanently.
A price would be paid by Germany but they would be better to take the hit to protect their long term interests.

Unlike Lincoln who had an army to prosecute a war against the secessionary south to preserve the union ,the Germans have no such recourse.
Unlike the United States however, a ‘States versus Federal Rights’ issue does nt arise as an EU Federal political union with its own Treasury , EU army etc. does nt yet exist.
Neither is Greece similar to the State of Michigan as alluded to above.

So the Solution for the Germans and Dutch would be to wage ‘Blitzkrieg’ against Greek bonds.
Legally,the Greeks would nt have a leg to stand on as every treaty from Maastricht to Lisbon would have to be put on ice .

Unless legal rights are regularly excercised they effectively become obsolete and are much harder to assert at a later date.


Breaking News: Martin_Feldstein, allegedly, has just been spotted in the company of MockaBabyBob attending the Ayeen_Rand recovery meetings on the dirt tracks around Merrion Square … and, allegedly, walking in an anti-clockwise direction. There is absolutely no truth in the rumour, to the best of my knowledge, that Martin has applied for the medical card. Looks like this recovery could take some time!

Feldstein, hopping balls or not, clearly does not think before or after he speaks.
Not someone whose utterances deserve analysis, as there are only so many hours in the day.

Well done Colm, for exposing him! You are playing a sticky wicket, along with friend Honohan. I wish you the best, but fear you will be unable to get any real progress. Keep trying.

“Well done Colm, for exposing him! You are playing a sticky wicket, along with friend Honohan. I wish you the best, but fear you will be unable to get any real progress. Keep trying.”

I expect many here would support your vote of confidence and support, but it surely says something when we are relying on these gentlemen – Colm McCarthy, via his temporary stint as co-chair of An BSN, and Prof. Honohan, via his more permanent position at the CB – to introduce some measure of economic literacy and probity in matters fiscal and monetary. All others who could contribute in some measure in these matters are consigned to be – and seem happy to be – “hurlers on the ditch”.

I am sure many of the principal contributors to this blog have been taken aback by the venom expressed by the “fire-breathing trolls” (© Karl Whelan) – and among whom I expect I’m numbered – about this largely self-inflicted financial and economic debacle. There is a clear public demand for guidance, enlightenment – even leadership – in a structured and effective manner from those whom they believe “should know about these things”. But they wait in vain.

@Pat Donnelly… Thanks for the link… Im looking for a description of what exactly the Greeks have been doing (allegedly with the help of Goldman Sachs, who Im sure are telling another department to short them)

What exactly have the Greeks been up to?
Are we sure the Paddies haven’t been at something similar?
How is this different to the proposals for NAMA?
Has NAMA been approved by the ECB yet?
Will this new found distaste for fraudalent accounting in Europe affect NAMA?
Have Anglo published their accounts yet?

@Paul Hunt

Nice try Paul to self-select yourself as a ‘fire-breathing troll’ – but the general clarity and critical pragmatism of your discourse suggest that you are unqualified for such a label ….. this place is screaming out for savvy action-oriented pragmatists ….

As for the ‘hurlers on the ditch’ – they are not hurlers and a ditch is far, far too visible …. a more apt description would be ‘scurrying self-protecting mediocrities in the depths of the burrows’ ……. and paid for by the taxpayer. At least those who post threads here, a tiny group in Irish academic terms, whether one agrees with their positions or not, have the balls to enter the public sphere and engage in some form of discourse with the great unwashed. The ‘smart Irish economy and society’, in other words, is Oxymoronic in the extreme. Supine is the term that comes to mind ………..

@Tony Demello – I am not sure how you can interpret my comments as suggesting that Ireland is going to or should leave the Euro? I am not.

As for Greece, I am not arguing that they should leave or that they are going to ben actively kicked out. However, the facts are that the Greek public are not willing to take the cuts that have been announced, and more cuts are being asked of them by the EZ members (a load of finance ministers were cuing up to state that they were looking for more).

Something has to give – either the Greek people accept the bitter medicine or the EZ members have to cave in.

The mood, and political reality in Germany, suggest a cave in is unlikely. The junior coalition partner is not going to take it full stop. They want tax cuts, which the finance minister does not want to agree to as there is no money for this – in that context giving German tax payers money to Greece is going to be difficult to sell. Angela Merkel boasts that she stopped a deal last week (at least her spin doctors are).

If neither gives in, Greece is going to be in a terrible mess and that could result in them involuntarily leaving the EZ (and possibly the EU).

I don’t know how likely this scenario really is but, I have said it before, one thing is for sure any deal will be on the German terms – and that means serious concessions. Nothing else could be sold in Germany.

I think people need to calm down with the tin-foil-hat conspiracies on what Ireland “has done” similar to the Greeks on the dodgy derivatives. For one thing, Ireland has virtually no foreign debt issuance other than some short dated USD commercial paper. As such, any even remote incling of an FX derivative would be highly unusual, and we haven’t even had that said incling. Also, we have not entered into any securitisations over future day-to-day income streams like many European countries have. As such, i think its irresponsible to suggest otherwise without at least citing something to back it up.

@David O’Donnell,

Thank you for these observations. I do recognise the benefits – and limitations – of this blog and genuinely applaud the willingness of the principal contributors, as you put it, “to engage in some form of discourse with the great unwashed”. But Ireland, like many other countries, is experiencing not just ‘game-changing’, but ‘game-shifting’ events.

In more ‘normal’ times this blog would apply some very necessary additional scrutiny of economic policy. But these are not ‘normal’ times. The powers-that-be – political, business and unions – are straining every sinew to return to the status quo ante and to play the same old game under the same old rules. And indeed it appears that they may succeed in the short to medium term. But, like Wile E Coyote momentarily in suspension beyond the cliff-edge, they have lost every shred of legitimacy – moral, democratic and, probably even, legal – required to justify this behaviour.

I happen to believe it’s not enough simply to point this out. Nature abhors a vacuum. And this is a vacuum that has the potential to attract some nasty forces.


Completely agree. In the absence of any shred of evidence it is both unwise and irresponsible to traduce, even implicitly, the integrity of the NTMA – probably the only state body that has retained both national and international credibility throughout this debacle. However, it is, perhaps, significant that the moral integrity of the powers-that-be is held in such low esteem that such a rumour runs the risk of gaining traction.

@Paul Hunt

Very briefly – gotta go make a living ……… Yes, we are in game shifting territory …….. and look at the Dail at the mo —– all agog at the alleged if dubious existence of a few ladies on the game ………. and another generation being lost ………

I’m 100% pro Europe and proEuro, have praised sound record of NTMA, and make linkages to GoldmanSachs only as it relates to Greek situation as it impacts on EU, that is US … on this blog. And I put me name to it (-;

@Edgar Morgenroth
“@Tony Demello – I am not sure how you can interpret my comments as suggesting that Ireland is going to or should leave the Euro? I am not.”
No such imputation intended and I am happy to clarify this.

I do think though that with people wondering if Greek democracy will collapse it is long past time for Europe’s leaders to stop going eyeball to eyeball with them. The Grecian Missile Crisis has gone on for long enough. Make a deal now. Otherwise the EU should bin all this talk of the superiority of Europe’s social model over nasty Anglo-American capitalism.

@Paul Hunt
Ireland’s current government are an aristocracy. Laws and standards are for the little people.

Suppose during an election campaign a national newpaper journalist had slandered a government minister – of either party – in an interview to a local paper. Suppose the local paper had published a story on it. Suppose the minister had sought an injunction. Suppose the journalist had then sworn a mistaken affidavit a month later denying they had said the sort of comments it would be almost unbelievable to forget saying. Suppose the minister’s injunction was refused. The election then took place.

Then suppose that some months after the election the journalist had been forced to concede that they had made the comments and had to apologise unreservedly, concede their sworn affidavit was incorrect and pay damages. Would the journalist have kept their job? No way.

Our current government impose much higher standards on the media than they obey themselves, just like an aristocracy.

zhou_enlai Says:

“The scariest part of the article comes at the end:
The writer is professor of economics at Harvard …”

In the end, the difference between those two departments might be the difference between salt air and thin crust pizza vs. freshwater air and thick crust pizza.

It’s long past time for both to go into forced retirement.

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