A proposal for the dismantling of the Eurozone

Via Eurointelligence, here is a link to a working paper issued by the Polish Central Bank, which proposes the dismantling of the Eurozone under the direction of the ECB. (Not sure I’d trust them with the job, myself.)

29 replies on “A proposal for the dismantling of the Eurozone”

This looks like an idea whose time will come, though most likely it won’t happen until we have had a partial recovery and then another crisis. It takes time for lessons to sink in. The big problem is that for an orderly breakup, Germany and other competitive countries need to leave first, which they probably won’t want to do unless the weaker countries can hijack the ECB.

This is a glugger throw it out immediately.

3. Only domestic contracts should be converted into new currencies in exiting countries.
In exiting countries, only domestic contracts should be converted into a new currency, while all
contracts with foreign parties (including bank deposits by non-residents and loans to non-residents)
should remain in euro. At the very moment of Eurozone exit, non-residents in exiting countries would
be legally prevented from making deposits in the new currency (or currencies). This restriction could
be lifted after a very short period (possibly one or two weeks), once the new currency (or currencies)
have already appreciated within the exchange rate band (or bands).

We need an immediate 66.6% depreciation in the new currency. After a few weeks that might stabilise at 40%, particularly with the BOE, Bundesbank and other interested parties gaming the system. Of course international contracts will be paid off in the new currency. Remember Argentina and forget 1916. Also keep in mind the hundreds of contracts we entered into with foreigners that were not worth the paper they were written on. The new Punt is at par with the Euro for milliseconds and we pay off our external debts on that basis.

The Poles want to eat their cake and have it too. Honohan should tell them Bertie and Brian are gone and the Patsies will not be bitten twice.

As Eurointelligence comments, “Working papers do not reflect the views of monetary policy committees of central banks, but central banks usually makes sure that the papers are not openly contradicting their own message. We are just wondering what the purpose is behind this paper.”

So are a lot of people, especially at this point in the election campaign.

One could hazard a guess that German leaders have shown no consideration whatsoever for Polish sensibilities on a variety of issues and the Poles are now returning the compliment.

There would be a lot of support in Germany for casting off the PIIGS. The PCB is simply putting up a trial balloon to see what the reaction will be. It will go down well with Polish nationalists, Dutch, Finns, Austrians and a couple of other short sighted, greedy and selfish countries.

There is no doubt but that the EuroZone is in trouble and that it would be prudent for the Irish Gov’t to have plans B and C in place. We do not need a replay of the startled naifs scenario that played out in 2008. Keep in mind it will all come apart unexpectedly some Sunday night after midnight and before 6:00 a.m..

Dismantle the Euro before it destroys European democracy. Letting the Germans leave with their allies would be an elegant solution.

I recall someone here (Kevin O’Donoghue?) suggesting exactly this several years ago but isn’t there a problem that the countries in the Eurozone with the ability to leave (Germany, Austria, Finland) and still finance themselves also have the most to lose (Euro denominated debts which would noticeably devalue).

Since much of the unpleasant charade of the ECB’s German inflected response to the European component of the global financial crisis (and indeed Eurozone austerity) has been based on protecting creditors from losses this would not be done willingly. The ECB is also the joint third last organization on earth that should have any input into the new EU currency arrangements (after the OECD and the BIS, tied with DG-ECFIN, before Olli Rehn’s institution).

The peripheral countries made a terrible mistake when they got on board with stabilizing the Eurozone when it needed to be restructured (perhaps demolished). Contagion was our friend. Now, awful as it would be to do, a primary surplus might have to be achieved in order to escape the disastrous tyranny of EMU.

Shay, I’ve long felt that a German exit is the happiest ending we can hope for, but AFAICR Wolfgang Munchau said something similar ages ago. The real problem isn’t the debt writedowns, which will happen anyway since you can’t get blood from a stone; it’s German exporters who are the biggest winners from a system in which Germany can remain super-competitive for years on end.

It might work but only after there is an orderly progression back to normal interest rates. The risk of a blowup with a combination of Euro breakup and an interest rate rise for the hedgies to test to destruction would be massive. There is already far too much liquidity sloshing around looking for a bet instead of trying to get people back to work.

Martin Wolf has a good comment.


The bit I like the best is the following;

“The core global financial system became the ward of the states. The idea that this was a private system was revealed to be an illusion. Taxpayers woke up to discover that bankers were exceptionally highly paid and out-of-control civil servants.”

The EA proposes doing something radical about changing this situation. The US, i.e. the Fed, it would seem does not.

The FT Brussels correspondents, Peter Spiegel and Alex Barker, have the agenda for the work at the actual coalface.


They conclude on banking union;

“The open question will be how much control nations cede to the new authority and what Germany will demand to fill the financing gap while a levy on industry builds up the resolution fund.”

The approach, incidentally, is close to that studied and noted by Professor Adalbert Winkler of the Frankfurt School of Banking i.e. essentially a collective insurance scheme financed by the banks themselves which mirrors that which existed in the US before the creation of the Fed in 2013.

As Europe is not going to turn into the United States of Europe any time soon, it is the only logical step.

Whatever scenario EA leaders are working to, these do not include a break up of the euro.

Or, perhaps more accurately, the Fed has the QE tiger by the tail and simply doe not know how to let go of it.


While it slows its efforts to do so, the context for decisions in Brussels post the German elections improves. The SPD is, of course, a fan of the banks being forced to look after themselves, the sovereign involvement to be financed by the proposed FTT. While this seems dead in the water, the Commission must continue to insist that the parrot is alive. However, a half-a-trillion euros in the ESM can hardly be left sitting idle.


The Fed would only start tapering if it felt the US was making sufficient progress. The last non farm numbers were underwhelming. For all of the liquidity not enough jobs are being created.

“The consumer is in no position right now to lead the economy out of recession”

So the peripheral economies should try and recover lost competitiveness by having a euro-mini and benefit from devaluation?

It didn’t seem to work out that well when most of them had their own currencies.

Ireland, Greece and Spain had the highest jobless rates in the OECD in 1993.

Currencies had been in turmoil from mid 1992 and on Sept 16 1992, on what became known as Black Wednesday the UK quit a European exchange arrangement. On the same day Sweden’s Riksbank raised its overnight rate to 500% to defend the krona.

Spain had 4 devaluations in 1992-95. Its unemployment rate rose from 22% in 1993 to 24% in 1994 and it was 21% in 1997.

Italy’s unemployment rate was 11.2% in Dec 1996 and also in Dec 2012. It was 10.7% last July.

The paper resembles a PowerPoint presentation with limited written depth on the various scenarios.

With the euro accounting for 33% of international reserves, countries like China already incurring losses on euro-maxis would unlikely take euro-minis for payment of exports. Maybe they could do renminbi deals.

It would hardly be politically and legally feasible to retain the ECB while adopting a new currency. ‘Whatever it takes’ would mean what?

The problem for the euro-mini countries would be that import prices would jump before there would be a benefit for exports. The reaction to jumps in prices of items like bread could make the austerity protests look like Noddy’s playtime by comparison.

Also, in place of Germany, Italy would be the main economy.

Ireland would get the price rises without the benefit of a falling currency because most exports go into global supply chains.

The guys like Draghi himself, have been fooled by Ireland’s apparently low unit labour costs.

There should be a mechanism for individual countries to leave but it couldn’t be a free lunch.

As for a EU-US trade agreement, I doubt if it will be a huge development.

It’s all right we are out of recession (for the third or forth time in as many years) according to the CSO. We don’t need to leave the Euro, the Euro needs to leave us!

Well spun Mr. H. Straight out of the DOF anti deval diatribe of 1991. What happened after that deval, monetary conditions eased and growth surged for Ireland. The world did not end, people in the periphery did not starve.

@ Tullmcadoo

The biggest spin of all must be the claim that a 10% devaluation of the Irish punt triggered an influx in FDI and a surge in indigenous exports – in effect it was the launch pad for the Celtic Tiger.

All those big US firms that followed Intel were they reacting to the high tech boom in the US or Bertie’s devaluation?

Bertie was indeed the new Moses!! There were indeed plenty mice that danced to his tune.

According to the 2004 official report ‘Ahead of the Curve’ produced by the Enterprise Strategy Group in 2004: “Over the period 1990-2002, exports by agency-assisted indigenous enterprise grew in nominal terms at 5.5% per annum (versus 15.9% for foreign-owned companies). When inflation is taken into account, the real growth in both sales and exports was negligible.”

Have a look at the Central Bank chart here and the flat-line in particular.


If I echo the DoF line, which is rare, it’s by chance.

@ seafóid

The comment by Mohamed El-Erian seems to me to be right on the money, especially when he says that the Fed acted when other – much vaunted – institutions of a federal state failed to do so.

What I find rather puzzling is the determination in many academic quarters to concentrate on the funeral arrangements rather than the efforts being made by the doctors to save the euro patient.

One has to be careful for what one wishes for.



“What I find rather puzzling is the determination in many academic quarters to concentrate on the funeral arrangements rather than the efforts being made by the doctors to save the euro patient.”

I presume your sure it’ll be grand don’t be so negative approach goes some way to explaining the absence of

• a banking union with a single supervisor
• a single resolution authority
• a common safety net involving
o Deposit insurance
o fiscal backstops
o burden sharing and
o a credible Lender of Last Resort

in the EZ when TSHTF.

Sure what could go wrong ?

@ seafóid

So! You make up a list of what you consider to be the minimum desiderata for the successful operation of a monetary union. Like the qualifications of an ideal football team.

And predict disaster!

I prefer to observe what the players on the field are actually doing.

A good proposal with some negatives that has little chance of making it.
Key Elements:
1. Consensus- The creditor countries have no interest in consensus. They are in debt collector mode.
2. Exit of most competitive i.e Germany. Not a chance. Why leave the field when you are winning.
3. Domestic contacts only converted. Another loss allocating formula, directly from ECB or BUBU. A non starter (HT @Mickey Hickey)
4. ECB to remain as Central Bank. Insert smiley here. The partiality of the ECB in this crisis, its list of bootboys, past and present, and its dominance by Germany render it completely incapable of serving Europe. Shut it down.
5. A new currency ‘co-ordination’ system: Boy, we could do with some co-ordination. A post operative ECB, with HQ on the island of Chios, next to Syria, might come more alive to the idea of co-ordination.
6. Countries in crisis to continue to receive ‘support’!!! Support!!!. Yes support, but please leave out the word ‘continue’.

All that said, the document presents an excellent analysis and is very, very well written.
However, imho, the EZ bobsleigh is in out of control mode. The driver is well strapped in, pity about the passengers.
The sooner it capsizes, the better-for the passengers (HT @Tull).

The efforts made to save the patient seem to include bleeding with leaches, trepanning and amputation sans anesthetic. Some surgery is necessary on the fiscal front such as a move back to a primary surplus.

But that needs growth and for growth to happen requires a massive monetary stimulus to offset the necessary fiscal tightening. . We also need debt restructuring at the sovereign level and also at a more limited level at the personal level. That is to going to happen in the current German monetary hegemony and I suspect that the centre cannot hold for much longer.

The tragedy of the EZ is that Germany is doing exactly what is prescribed by orthodox economists. Beggar thy neighbour by keeping wages in check. Keep the cost of housing down to match the low wages by regulating the banks and near banks.

Ireland did exactly the opposite, our strategy was as complex as betting it all on the favourite in the 3 o’clock at the Curragh. We then borrowed up to the present day to keep the excitement going. Poland has paid attention to what is being done across their western border. The Poles are building a sound country not just by managing their economy but by building military strength. We are all products of our history some more than others.

This doesn’t work for Ireland.

a) We don’t have an exchange rate problem
b) Whilst saying euro deposits of paddies in Germany will remain euro deposits will not prevent an enormous run into sterling, you wouldn’t see me for dust as I speed up the M1
c) We have no homogeneous economic partners in the EZ

Come to think of it, there is a solution for Ireland within this plan, announce the conversion of Irish euros to sterling. I don’t think that would trigger a run.

On the big picture scale this looks very short termist. The authors talk about no likelihood of the required political changes this century. Imagine making similar statements 100 years ago.

Ultimately true European integration will involve a common currency. This move would be a huge psychological blow to that notion. The idea that the ECB would ensure that EMS 2 would succeed were EMS 1 failed is at best naive.

When I read nonsense of this sort I always ask myself qui bono. Maybe Poland wouldn’t mind a bit of new D-mark appreciation.

@ All

This opinion piece by the German Ambassador to Ireland is appropriate to this thread.


As one might expect, this is the standard official line.

“Europe will not be a decisive electoral issue. Euro zone problems are high on voters’ minds and Germans know they need stable and prosperous neighbours for their own stability and prosperity. But they are concerned that we are being asked to take on too many liabilities that could turn into real losses. So even if the opposition wins, they would have no mandate for radical change and would also have to reconcile two objectives: helping partners to recover in a way that contains the risks for the German taxpayer.”

The implication is that Germany has been managing her economy as a paragon of economic virtue when the evidence that this is not the case is the likely failure of Merkel to gain a majority. Grudging concessions with regard to the basic idea of the introduction of a statutory minimum wage, by way of example, or recognition of her unhappiness with the Energiewende, come rather late.

It will also come as a bit of a surprise to the other creditor countries that Germany, like Atlas, is carrying the burden of Europe on her own. This is, unfortunately, the recognised popular narrative courtesy of her approach to the crisis which the AfD show every sign of taking advantage of.

In my opinion Germany will not initiate the break up of the EZ. Countries with a population of less than 15-20 million can default individually with little effect on the EZ as a whole. Spain, Italy or France defaulting would be a stake in the heart of the EZ and it is highly likely would cause a disorderly break up not just in the country exiting but in the EZ as a whole. Armoured cars would be headed for refuge in Switzerland, Russia, GB with traffic to the US on flights booked months ahead.

To paraphrase Roosevelt we having nothing to fear but lack of confidence in the EZ itself.

Germany is up against tough customers in export markets. Japan is rebounding, China is on the edge of exporting big ticket items such as appliances and cars to the developed countries. Korea is very competitive and the US is now more like a Latin American country than it is like Germany. Engineering genius and low wages in China coupled with low wages in the USA present a formidable challenge to German manufacturing. Even Canada is pouring hundreds of millions in subsidies into durable goods manufacturing.

Merkel’s achilles heel is that workers in Germany have not had increases in income more than the rate of inflation for well over a decade. They see all their productivity gains going to the executive and shareholders. This will not kill her chances but it will weaken her on the 23rd. Germans have an acute sense of fairness which applies internally as well as externally.

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