Wolfson’s prize is impossible to win
“Lord Wolfson, a prominent eurosceptic . . . is offering £250,000 to the person who comes up with the best plan for winding up the euro in an orderly way. The Wolfson Economics Prize . . . will be the second-largest cash prize for an academic economics after the Nobel Prize.” – Financial Times, October 19
Cheap at the price.
Very cheap. The European financial stability facility has €440bn to disburse, and it’s a sign of the eurozone’s woes that this is widely regarded as far too puny.
Let’s hope somebody wins it, then.
I doubt that will happen. Lord Wolfson is offering a prize for turning an omelette back into its constituent parts.
I like omelettes.
So do I, but the eurozone is currently lacking in light, fluffy deliciousness. Hence the talk – and not just from millionaire eurosceptics – of a break-up.
Will that help?
If Greece somehow managed to leave the eurozone in a tidy fashion, that would help up to a point. Many of Europe’s peripheral countries, including Spain, Italy and Greece, have a growth problem for which a neat euro exit could be a cure. Their wages and prices are too high relative to those in Germany and so they’re struggling to grow. Wages and prices can of course fall, but that is a slow, painful and politically fraught process. If they had an independent currency, they could devalue and the growth problem would disappear.
Great. Well, that’s sorted then.
You’re forgetting about the omelette. In any case, the eurozone has two other problems that are distinct from slow growth in southern Europe. The first is that Greece’s government simply cannot repay the money it has borrowed, while some other eurozone countries are struggling with their own financing for various reasons. The second problem is that many of Europe’s banks lack – or are widely thought to lack – the financial cushion necessary to cope with this level of sovereign debt distress. A euro-exit, no matter how neatly done, will not solve either problem.
If Greece or Spain left the euro and devalued the peseta or the drachma, their pre-existing euro-debts wouldn’t shrink. In fact, relative to the devaluing economy, they would grow. One of the questions Lord Wolfson’s prize winner is supposed to answer is what happens to euro-debts after an exit – especially if, for instance, a Greek citizen has borrowed in euros from a German bank. There is no easy answer to that, as well he knows.
Is that why an orderly exit from the eurozone is so difficult?
It’s one reason. Another is the transition itself. Think about what’s going to happen if Greece leaves the euro: a bank account with €10,000 in is suddenly going to have 10,000 drachmas in. A salary of €800 a month will become 800 drachmas a month.
Seems simple enough.
But then the drachma will immediately collapse. Your 10,000 drachma bank account will be worth, say, only €3,000. And that means you’d have been much better off if you had moved your cash to a bank account in Germany, or converted it into euro notes.
When the Greeks figure this out, won’t they start rushing to move money out of the country?
I think the Greeks are ahead of you on this one.
They can’t have moved everything out of Greece.
No, and if Greece does leave the eurozone the flight of euros is going to have to be stemmed. Banks will have to close, international transfers shut down, perhaps the country’s borders will even have to be closed to prevent suitcases of euros being carried across.
Sounds painful but temporary.
Perhaps – but the next problem is that if Greece leaves, anyone with euros in Spain or Portugal or Italy is going to start asking whether those countries are next. Euros in Spain will be worth less than euros in Germany. At that point a fear of a euro break-up could become a self-fulfilling prophecy.
Looks like this will be a difficult prize to win.
Yes. Lord Wolfson has made his point, in a way.
In another way, it is odd to complain that a euro-exit would be messy and difficult. That is the nature of adopting a single currency: if it could be dissolved on a whim, it wouldn’t have any value or significance in the first place. As with a marriage, the binding commitment is pretty central to the whole idea.
So Lord Wolfson’s money is safe!
Yes. If only that were true for the rest of us.
Also published at ft.com.
9 Comments
Rick Yagodich says:
From the arguments put forth here, it seems to me that the problem with finding a spin-off resolution is that everyone is looking at it the wrong way.
Yes, if a single “toxic” country, or even a group of them, were to leave the Euro, the consequences outlined above would kick in. More damage would be done to the already hurting economies.
The solution, then, is for the stronger economies to leave the Euro. I know, you’ll never get the French or German politicians to go along with this – after all, it is their baby.
Some of the effects outlined here-above might still exist, but in a different way. The exited countries’ banks could still hold accounts for people in Euros (I can go to my bank here in the UK and open a Euro account). People may rush to move their money to the exiting countries, but there could be policies in place to mitigate that, such as only pre-existing accounts will be converted to the spun-off Franc or Mark. For sure, there will be some “losses” incurred, but that is a natural part of currency trading, which is exactly what this is.
At least with this approach to the issue, the pain of those losses will fall to the larger economies that thought up this absurd plan in the first place and forced it on the others.
(I can’t believe I am actually proposing a way to save that damned currency. If they wanted it saved, they really should have though before acting and not implemented it.)
22nd of October, 2011Martin Flower says:
It seems to me that Greek deposits and contracts need to remain in euro. The key requirement is to restore competitiveness : so salaries and domestic government spending would be in drachma. As the economy eventually recovers it would be likely that over time the euro would displace the drachma.
However, maybe it would be simpler to just legislate that all salaries and benefits are reduced by 25%. The question is what is politically mroe realistic.
Of course, this all assumes a partial default by Greece on outstanding sovereign euro debt – upon which there is probably a consensus now anyway.
22nd of October, 2011Tom says:
You’re missing the point – according to that FT quote he’s offering the money for the BEST plan, not a plan that will actually work; his money isn’t quite as safe as you think!
24th of October, 2011Henry Harya says:
What if Greece readopted the drachma similarly to the way Brazil did it in the Plano Real, with two currencies existing simultaneously? The drachma would start out as a virtual currency which they would convert to gradually. I’m just an armchair economist so I suppose it would be tricky with a lot of details to work out, but it could avoid that initial crash in the drachma, as the Greeks transition back.
And since nobody seems to have offered any better solution, does this mean I’ve just won the £250,000? :)
24th of October, 2011CdrJameson says:
‘Get Germany to leave the Euro’ was also my first thought on reading this.
24th of October, 2011Carl Clarke says:
Germany cannot leave the Euro either. As soon as they do their export mmarket would collapse since their currency would appreciate and make their products too expensive for its current export market.
25th of October, 2011Korla Pundit says:
Convert the Euros to dollars. But not the falling US dollar. It would have to be Canadian dollars. Then abolish the EU and the Euro altogether. Then AFTER having neatly winded up the euro in an orderly way, explode into another World War. That usually solves things for a half century or so.
26th of October, 2011Luke Metcalfe says:
Perhaps the Greek govt could apply disincentives for converting the reinstated drachma into other currencies. Like taxing it heavily. They need the money.
A few caveats. They would need to limit the supply of physical drachma notes, so people don’t acquire and cash out informally. And apply the legislation retrospectively to catch out people who saw it coming.
26th of October, 2011PHH says:
I think the largest leap for Greece leaving has already been taken. By the valuation of debt at 50% of face value, the Euro-conomists have suggested an appropriate exchange rate for the NewDrachma. Now wage rates relative to Germany need to drop 25% and import prices increase 25% and you will be nearly there, with sustainable growth possible afterwards. Support to stabilise the exchange rate may be needed, but at 50% is probably right, and certainly not needing near the level of €440bn. There will be deserved pain both for those who lied about their economic status and those who didn’t do due diligence on the figures.
1st of November, 2011