Wolfson’s prize is impossible to win

22nd October, 2011

“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.

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