Options for Europe – Part 75

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).

Part III – Options for Europe

Chapter 23 Abandon the Euro ­ Costs, threats and opportunities



“A Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup”.

London-based hedge fund trader, Toscafund
January 2013.

“It would be catastrophic if we were to say (to) one of those who have decided to be with us, ‘We no longer want you.'”
Angela Merkel, BBC Newsnight
March 26, 2012.

“Es wäre tragisch und geradezu fatal, wenn wir auf dem Weg zur Rettung des Euro und mehr Integration die Demokratie verlieren” (“It would be tragic and fatal if we were to lose democracy on the road to saving the euro”).
Dr Andreas Voßkuhle, President of the German Constitutional Court
Speech at Rhur Political Forum, Dortmund
February 6,2012

The Reuters news agency reported that the Italian Welfare Minister Roberto Maroni had indicated in a newspaper interview that Italy “should consider leaving the single currency and reintroducing the lira”. The Minister was quoted as saying that the euro was a “disaster” and “has proved inadequate in the face of the economic slowdown, the loss of competitiveness and the job crisis”. His remedy was to “to give control over the exchange rate back to the government” and empower the Italian government to “defend national industry from foreign competition” (Reuters, 2005). It might surprise you to know that the news report was from June 2005. The rationale for a nation leaving the Eurozone has become even more sound since the crisis. However, whenever the discussion turns to ‘Grexit’ or ‘Spexit’ or whatever the related acronym for Ireland, Italy, or Portugal, hysteria erupts. Shouts of devastation, catastrophe, hyperinflation, financial market lock-out, the end of Europe, impossible, and more are heard at the meagre mention of the prospect. What the politicians leaders hate the most is when the word Argentina enters the fray, followed a little later by Italy. The Troika can bully Greece because it is small, insecure in its own identity, and receives more from the European Union budget than it contributes. Italy is a different beast altogether not only because of its size and sense of place in Europe and the World, but also because it is a net contributor, by a large margin, to the European Union budget.

Goodhart and Tsomocos (2010) claim that “neither Greece nor any other country in a similar position could sensibly leave the eurozone, (indeed any sniff of thinking about that would cause an immediate banking crisis). Apart from the immediate effects on wages, prices and interest rates, existing debts are denominated in euros and any attempt to renege on that would, very likely, result in seizure of Greek assets abroad and expulsion from the eurozone, in addition to a cessation of European Union net transfers. In this respect Greece is far more constrained than Argentina was.” This assessment is typical of the mainstream catastrophe viewpoint and ignores the opportunities that restoring the currency would provide the Greek (or any other government). Argentina certainly demonstrated an alternative path to crisis resolution.

There is nothing irrevocable about the Euro or the Eurozone. While there are no formal exit mechanisms established in the relevant Treaties, short of military occupation, Greece and Italy and any other nation can do what it likes. Argentina showed in the early 2000s that it could take on the big financial market lenders and the multilateral bullies (such as the IMF) and take back its sovereignty for the benefit of its people. Argentina’s derring-do approach humiliated these global power elites and invoked all manner of threats and scaremongering, none of which really gained any traction. Far from lying down in a supplicant fetal position, cowering in the face of the demands of the IMF and the financial markets, Argentina ignored the threats and took several bold steps to resolve the crisis through domestic expansion and employment creation. It largely worked. Why do you suppose that there is an expanding literature being pumped out by conservatives extolling the so-called ‘failure’ of Argentina? The reason is that the big neo-liberal players who desire to catch nations hook-line-and-sinker into onerous financial obligations and penury do not want it to become too obvious that a nation can restore its full currency monopoly and deal with its external and foreign-currency denominated debts to its own advantage and prosper while doing so. There are clear differences between Greece, for example and Argentina, not the least the latter’s capacity to export a broader range of commodities and agricultural produce (soya beans), in particular to lucrative markets. But the general point remains valid – a nation that restores its own currency increases its options and it is then the foreign lenders that have to come bidding for a deal rather than the nation itself, submissively becoming captive to a Troika of predators working in the interests of the investment bankers and other corporate interests.

In this chapter, we examine what an exit from the Eurozone might involve. Would it be a disaster? One retort is that things couldn’t get much worse for some nations than they are now and so the assessment should be in terms of how quickly a recovery can be engineered. In considering an abandonment of the Euro and a restoration of currency sovereignty, there would be a difference between what we might term an orderly, planned dismantling of the currency union while reinforcing the political union through the European Parliament, on the one hand; and a disorderly exit by one or a few nations (for example, Greece or Italy), on the other hand. The obvious solution for one nation is not necessarily the best solution for all. The conjecture entertained in this chapter is that an orderly exit would be in the best interests of all nations even though there would be significant costs involved in making the adjustment back to full currency sovereignty. Further, it is argued that a single nation exit would have relatively minor consequences for the remaining nations but enhance the prospects for recovery of the exiting country, notwithstanding rather massive adjustment costs. The larger the current malaise, the lower would the relative costs of exit be.


European politics and policy making is caught in two very powerful and destructive Groupthink vices at present. The first, is the age-old ‘Rivalité franco-allemande’ or if you are on the other side of the border the ‘Deutsch-französische Erbfeindschaft”. A corollary to this rivalry is a disdain for the Latins who by geographic proximity cannot be ignored, much to the angst of those further North. The second, is the domination of free market economics, which though virtually deficient of any empirical validity and riddled with internal theoretical inconsistencies, still rules the academy and through its graduates, the policy making sphere. How the economics profession has been able to convince the rest of us that by ‘counting angels on a pinhead’ and then not being able to correctly add up those that they claim to see (their so-called ‘economic models’), could possibly represent a viable framework for enhancing societal well-being is a study in itself and constitutes one of the biggest frauds of the C20th and beyond. Indeed, there is very little ‘society’ in the mainstream economics, which thinks of us as being ultra rational, with massive computers for brains (able to see into the future with perfect vision), and only concerned about ourselves as individuals. Aggregations of individuals in their models make no sense at all. All the evidence from psychology and behavioural studies, that is, from experts who actually bother to study human behaviour rather than adopt abstract models of it while sitting behind a desk somewhere, tell us that the assumptions about human motivation and decision-making that are essential for the mainstream ‘economic models’ to work are nonsensical.

Neither vice will release its destructive grip on European affairs easily, and the cultural and historical aspects of the first are probably permanent constraints on progress. When the Gauls and the Germans began hating each other is a matter of history – but it was a long time ago. Historians create all sorts of revisions to suit their own angle, but it is clear that the two ‘nations’ were at odds after Napoleon incorporated German-speaking areas such as the Rhineland into the First Republic. His disdainful treatment of the German aristocracy, including the various German-speaking monarchs spawned German nationalism and led to the Franco-Prussian War in 1870. German unification was motivated, in part, by a desire for a German-speaking power to rival that the geo-spatial domination of France (see Wetzel, 2001). It is true that this ‘enmity’ has evolved in the Post World War II period and the diplomacy is less chauvinistic and the prospect of martial expression is minimal. Some have even considered the relationship between the two great European nations to be one of ‘Amitié franco-allemande’. But, always simmering is the clash of culture and the legacy of World War II. While the rivalry was intense and open under President de Gaulle, which held back European integration, later, the rivalry was expressed from the French side as a desire to neutralise German power – and the only way to do that was to create a European state where France hoped to dominate. From the German-side, whether anyone wants to talk about it or not, as a result of their actions during the 1930s and 1940s, a deep and silent shame gripped the nation. Their only source of national pride became their economic acumen – their technical and organisation skills and the discipline of their workers. They wanted the ugly German to become the clever German. European integration became a way the German nation could win back some respect by demonstrating that it could be part of a peaceful Europe and bring its engineering acumen to benefit all. Reunification accelerated that desire given how paranoid the rest of Europe, particularly France became when West and East were to become a united Germany. But, while Mitterand and Kohl seemed to be working together, the motivations were quite different.


The path to a disorderly exit

Several models have been put forward to describe how a nation such as Italy or Greece might unilaterally exit the monetary union. There was even the so-called ‘Wolfson Economics Prize 2012’, which offered £250,000 “to the person who is able to articulate how best to manage the orderly exit of one of more member states from the European Monetary Union” (Policy Exchange, 2012). All the models have to traverse the same terrain – how to handle the Euro-denominated debt both public and private; how to handle bank deposits denominated in Euros within Greece and ensure financial stability is maintained; how to actually introduce the new currency – unilaterally or as an interim dual currency; how large would the depreciation in that currency be and the consequences of that currency alignment for inflation risk, real living standards etc; the possible role for capital controls; how to deal with any changes to the legal framework governing cross-border trade if the nation also is expelled from the EU, among other issues.

The projections of the likely overall consequences that have been put forward also, crucially, depends on the economic framework that underpin them. The neo-liberal macroeconomics, which downgrades the importance of fiscal policy and currency sovereignty, not surprisingly, provides the basis for the catastrophe predictions. The resulting currency depreciation would be massive and on-going, leading to an uncontrollable surge in inflation. The currency would be totally debased. The nation’s banking system would collapse in the face of large capital outflows and debt delinquency. Credit provision to the private sector would dry up immediately and the businesses would fail and the housing market would collapse. There would me mass migration of skilled labour which would undermine the productivity future for the nation. The debt defaults would force the nation into a costly legal morass and would lead to being shunned by the capital markets. As a consequence of not being able to fund itself, the government would run out of money and the citizens would experience a massive decline in living standards. The nation would be mired in depression, poverty and isolation. Civil anarchy would erupt and give way to totalitarian regimes with vicious secret police departments enforcing order through torture and death squads. The predicted catastrophe would surely be many times worse than the future within the Eurozone. All of these predictions have been rehearsed in the recent literature. Almost every day someone will write something along those lines.

Conversely, adopting the MMT framework outlined in Chapters 18-20 as the basis for analysis would lead to dramatically different projections. It should be made clear that no-one really knows for sure what would happen. It would be hard to project the costs of the exit. But we can deduce several things based on historical experience. Further, we can condition our assessment on the assumption that the exiting government would dramatically change its macroeconomic policy approach. In other words, it is highly likely that the benefits will outweigh the costs of exit, if the decision to exit is also, simultaneously, a decision to reject the flawed neo-liberal, mainstream economics approach in favour of a fiscally-active policy stance that seeks to maximise well-being of the citizenry. If the exiting nation continues its idolatry of financial markets and considers it can ‘do’ austerity in a more gradual manner then the exit will likely be even more costly than provided for by the current outlook. Assuming a policy revolution takes place of the scale that we witnessed in the 1970s and 1980s, when the conservative Monetarism supplanted Keynesian activism as the dominant paradigm, then far from the state running out of money, the restoration of its currency sovereignty would provide it with numerous opportunities to bring idle resources, including the unemployed back into productive use. Real economic growth would be immediate. The bond markets would become supplicant when faced with a currency-issuing nation because they would understand that the central bank can control interest rates and force investors out of the market whenever they choose. Whether investors chose to buy any new public bonds issued in the new currency thus would be irrelevant. The newly empowered state would still be able to spend and purchase anything that was available for sale in its own currency.

The new currency would be empowered by the requirement that citizens and corporate entities would have to pay taxes in the local currency. By enforcing that legal requirement, the state would ensure that the private sector would have to get hold of that currency, notwithstanding any decisions or preferences it might have for a currency in which it might store its saving. Even if there is a second ‘trading’ currency in use, the local currency will always is in demand as long as the national government can enforce its tax laws. One of the major shortcomings of the several ‘dual currency proposals’ recently put forwards as a way to resolve the Eurozone crisis is that they still insist that state taxes and charges be paid for in Euros, thus giving rise to continued demand of that currency at the expense of the local currency (see for example, Goodhart and Tsomocos, 2010).


Additional references

This list will be progressively compiled.

Policy Exchange (2012) ‘Wolfson Economics Prize 2012’. http://www.policyexchange.org.uk/component/zoo/item/wolfson-economics-prize-2012

Reuters (2005) ‘Italy minister says should study leaving euro-paper’, June 3, 2005.

Voßkuhle, A. (2012) ‘Über die Demokratie in Europa’, Speech to Rhur Political Forum, Dortmund Concerthall, February 6, 2012 published in Aus Politik und Zeitgeschichte (APuZ), 13/2012, Bundeszentrale für politische Bildung, 3-9.

Wolf, M. (2013) ‘Why the euro crisis is not yet over’, Financial Times, February 19, 2013. http://www.ft.com/intl/cms/s/0/74acaf5c-79f2-11e2-9dad-00144feabdc0.html#axzz30L8DwwS0

Wolf, M. (2014) ‘Managing a Bad Monetary Marriage’, paper presented to iNET Conference, Toronto, Canada, April 2014.

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

This Post Has One Comment

  1. Think you mean ‘be’ not ‘me’ in:

    ‘There would me mass migration of skilled labour which would undermine the productivity future for the nation.’

    Really enjoyed these extracts – particularly how clearly you have described Argentina’s ‘plight’ and the hysterical nonsense about “Grexit’.

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