Wednesday, 22 June 2011

Emergency exit from the euro

I guess we all know what an orderly exit from the euro would look like, say for a distressed country like Ireland or Greece. First there would be months of arguing about whether it's even a good idea, then legislation to effect the change would be required. This would take weeks, or months, to pass through the various law-making bodies, with more argument every day. The new currency would be printed and minted and distributed to the banks for the big day. An exchange rate between the euro and the new currency would be decided and ready-reckoners issued to the public.

Once the new currency was out there would be a period of parallel running as people gradually ran down their stocks of euros and built up their stocks of the new money. On a particular day every bank account would be re-denominated into the new money; all salaries, benefits, pensions, debts etc would be recalculated and people advised accordingly. The whole operation would take a couple of years at least.

This would all work fine if the country doing it was Germany, and the new currency was called the New Deutschmark.

If say, Greece, tried it there would be an instant run on the banks as everyone tried to extract their euro savings and hoard them until the new currency was up and running and then they'd convert back, at an advantageous rate. People would also borrow as many euros as they could and buy assets such as gold with a view to selling the gold and repaying the debt in a debased new currency. There would also be endless litigation by people holding Greek debt to try to stop it from happening in the first place.

So there's no orderly exit from the euro for Greece.

But what about an emergency exit?

Legislators would meet in secret. They would draw up the act of parliament in the dead of night. For simplicity they would stipulate that one new drachma equals one euro. Covertly a new currency would be printed, and new coins minted. The notes would be the same size and shape and denomination as euros, the coins would be the same size and have the same alloy content: all this to ensure that ATMs and note and coin operated machines wouldn't have to be changed. The new currency would be shipped to Greece in greatest secrecy. (This isn't an unprecedented operation, the Swiss freely admit they have a complete alternate currency already printed and ready to issue, just in case the Swiss Franc is compromised in some way.)

Then the Greek parliament would be summoned in an extra-ordinary session, probably on the first day of the Easter four-day break. The conspirators would present their bill. It would be debated and passed in hours, not weeks. The public would certainly become aware of the plans at this time. A public announcement would be made. The banks would be ordered to remain shut until further notice. There would be a run on the ATM network; that would be unavoidable, but they would soon be empty.

The new currency would be driven from its secure storage to the banks. Every deposit and every debt would, by fiat, be denominated in the new currency. The banks would forcibly have their cash stocks exchanged on a one-for-one basis. It would smooth the adoption of the new currency if it looked very similar to the euro. Of course actual euros would be hoarded, but by then it would be too late. The fait would be accompli and a new currency would be launched and all that would remain would be to see how far and fast it sank.

Do the Greeks have the organisational skills to make this happen? Of course not. If they did, they wouldn't be in this mess in the first place.

1 comment:

Anonymous said...

BN I have seen many of your posts on HPC, you are of course right, I'm a TFHer myself and believe its all gone over the point of no return, welcome to a future of starvation and war, the colapse is comming it wont be pretty