• Posts
  • RSS
  • ◂◂RSS
  • Contact

  • How Might a Country Leave the Eurozone?

    October 21st, 2011
    econ  [html]
    A traditional answer to economic problems in a country has been to allow some inflation. In joining the eurozone (replacing their existing currency with the euro) countries gave up this option. Now some of them need it back. How might they leave the eurozone and switch back to a currency of their own, as a step in economic recovery?

    A simple answer might be "you close all banks, relabel everything (deposits, debts, salaries) in the new currency, print a bunch of money in a hurry [1], and open again as soon as possible". Then you end up with a currency that can start falling against the euro until your country is competitive again. In fact, a fear of this is leading to a "silent bank run" where people in greece are withdrawing their euros to store in safe deposit boxes or german banks:


    source

    People also have debts to foreign banks. Say I'm in greece and we use this plan. I am suddenly getting paid in drachmas which have fallen against the euro, but most of the stuff I want to buy is cheaper too, so I'm ok. Except that debt for things I bought in the past and still owe foreign banks for becomes even more difficult to keep up with.

    There's also the issue of government debt. Would a departing portugal just claim that the debt it owed is now in escudos? Would they default on their debt entirely? (Which seems to have gone ok for argentina)

    There may not be any good solutions. Perhaps by joining the eurozone countries gave up this freedom for good. But if you don't believe this, and think you know how a country might switch from the euro, your answer could win you $400K. The prize rules require the proposal to be entered by the end of january and address:

    • Whether and how to redenominate sovereign debt, private savings, and domestic mortgages in the departing nations.
    • Whether and how international contracts denominated in euros might be altered, if one party to the contract is based in a member state which leaves EMU.
    • The effects on the stability of the banking system.
    • The link between exit from EMU and sovereign debt restructuring.
    • How to manage the macroeconomic effects of exit, including devaluation, inflation, confidence, and effects on debts.
    • Different timetables and approaches to transition (e.g. "surprise" redenomination versus signalled transitions).
    • How best to manage the legal and institutional implications.
    • A consideration of evidence from relevant historical examples (e.g. the end of various currency pegs and previous monetary unions).

    Can you solve this puzzle?


    [1] That's impractical to do on short notice, so either you've prepared new money (very quietly) in advance, or you could try just taking euros and putting a special stamp on them (though then your currency can only go down against the euro).

    Comment via: google plus, facebook

    Recent posts on blogs I like:

    What should we do about network-effect monopolies?

    Many large companies today are software monopolies that give their product away for free to get monopoly status, then do horrible things. Can we do anything about this?

    via benkuhn.net July 5, 2020

    More on the Deutschlandtakt

    The Deutschlandtakt plans are out now. They cover investment through 2040, but even beforehand, there’s a plan for something like a national integrated timetable by 2030, with trains connecting the major cities every 30 minutes rather than hourly. But the…

    via Pedestrian Observations July 1, 2020

    How do cars fare in crash tests they're not specifically optimized for?

    Any time you have a benchmark that gets taken seriously, some people will start gaming the benchmark. Some famous examples in computing are the CPU benchmark specfp and video game benchmarks. With specfp, Sun managed to increase its score on 179.art (a su…

    via Posts on Dan Luu June 30, 2020

    more     (via openring)


  • Posts
  • RSS
  • ◂◂RSS
  • Contact