Thursday, 24 June 2010

Revert to Old Currencies Temporarily

Financial Times

Sir, Vincent J. Truglia (Letters, June 18) is right in maintaining that the status quo in the eurozone is unsustainable, but is wrong in prescribing as a solution that peripheral countries should exit the euro as soon as possible.

Irrespective of whether or not conversion of the euro-denominated debt back to domestic currency would be a default, there is no argument that such a measure would cause turmoil in the European banking system as banks incur heavy exchange losses on their massive holdings of euro-denominated sovereign debt of EU peripheral countries. This cannot be good for anyone, least of all the weaker EU economies.

A better solution would be for the core countries to exit the euro and temporarily revert to their old currencies, which would harden substantially against the euro. This would bring an instant re-adjustment of competitiveness to address the current grave intra-EU trade imbalances.

It would shift macro-adjustment in EU peripheral countries away from counter-productive austerity measures to more bearable growth policies. It would also spread the adjustment pain across a much wider spectrum, including the surplus EU countries and foreign holders of EU reserves.

Eventually, when the euro architecture is rejigged through the creation of a single treasury, or at least through the creation of an EU authority that controls national budgets and centralises all borrowings on an EU-wide basis, the currencies can be remerged into the euro version 2.

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