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Euro vs. Neuro

“And the king said, Bring me a sword.” German business leader Hans-Olaf Henkel offers a Solomonic solution for Europe’s terrifying debt crisis—cleave the Euro in two. Henkel’s plan would create a new currency for the northern eurozone countries that aren’t buckling under massive debt – the “neuro.” The reeling Latin countries would then be left with the old euro, freeing the ECB to lower interest rates for the benefit of the struggling southern economies. Says Henkel in the Financial Times:

That is why we need a plan “C”: Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is. If planned and executed carefully, it could do the trick: a lower valued euro would improve the competitiveness of the remaining countries and stimulate their growth. In contrast, exports out of the “northern” countries would be affected but they would have lower inflation. Some non-euro countries would probably join this monetary union. Depending on performance, a flexible membership between the two unions should be possible.

“Implementing plan “C” requires that four underlying problems are addressed separately. We must rescue banks, not countries. Stabilisation of banks on a national level should replace current European umbrellas. In many cases, this requires temporary bank nationalisation. Second, Germany and its partners in a new currency must forgo a significant portion of their guarantees to help refinance Greece, Portugal and others. As much of this money is already lost, this is an acceptable price for an “exit ticket”. Third, there must be a new European central bank based on the Bundesbank, preferably not led by a German. The new currency should not be called the “D-Mark”. Fourth, mechanics for entry would be similar to those for getting into the euro. If it was possible to form one currency out of 17, it should also be possible to form two out of one.

The plan may succeed where the euro failed because it recognizes the fundamental division in Europe’s economy: the wide gap between the frugal North and the troubled South. Under the euro regime, low interest rates that suited northern economies like Germany just fine encouraged ruinous lending practices, real estate bubbles and excessive government borrowing in southern countries like Greece and Spain. As contagion spreads across the Mediterranean coast, the economic needs of the two regions continues to diverge; debates over the common monetary policy now serve to divide Europe rather than unite it. A drastic alteration of the single currency may be necessary to preserve European unity.

The worst problem with Henkel’s solution is not economic, but political. France, which sees parity with Germany on EU leadership as its core policy objective, would likely kill any such plan out of sheer pride. After holding up leadership of Europe as the pillar of France’s nationalist aspirations, French politicians will find it politically impossible to allow the Germans to exit the eurozone while they stay behind in a second-rate southern club.

A second problem: it’s doubtful that the Greeks, Spaniards, Portuguese and Italians will be able to agree on the policy coordination and solidarity necessary to keep the new and smaller euro club together.  Europe might be left with a strong neuro, a slightly less strong French franc, and a group of weak southern currencies.

Henkel is completely right about one thing: Europe needs to focus on saving Europe rather than on saving the euro.  The euro is an instrument; a peaceful and prosperous Europe is the goal.

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  • Peter

    Parasites don’t leave their host willingly.

  • Luke Lea

    The neuro for the neurotic, the euro for the . . . erotic?

  • Monty

    The problem with this plan is twofold:

    1. All current Eurozone debts are denominated in current-day Euros. Do these debts get redenominated? If so, into which currency: the old or the new? How would this be achieved?

    2. Since the stronger northern Eurozone countries are export driven, wouldn’t the stronger currency drive them into recession by making their exports expensive to the countries still on the “old” Euro? (Germany is already experiencing a flatlining of their GDP due to exports slowing down.)

    Greece must default at some point; that’s as close to a mathematical certainty as anything in this world at this point. Ireland and Portugal may very well follow. Spain and Italy might yet be saved, but time will tell.

    It’s time for the Eurocrats to realize that the “common currency” dream was stupid and abandon it. It was doomed from the start.

  • WigWag

    “Under the euro regime, low interest rates that suited northern economies like Germany just fine encouraged ruinous lending practices, real estate bubbles and excessive government borrowing in southern countries like Greece and Spain.” (Walter Russell Mead)

    I’m not an economist, but I find it very hard to understand how, in practice, two currencies can be created out of one without making things worse.

    Spain provides the perfect example. Perhaps Professor Mead or one of his readers can explain it, but I always thought that one of Spain’s major problems was a banking crisis sparked in large part by a major housing bubble similar to what we experienced in the United States.

    As recently as 2008, Spain’s government debt as a percentage of GDP was only about half as large as the public debt in Germany. While it’s true that low interest rates caused wages to explode while productivity did not, wasn’t the original sin of the current Spanish economic crisis irresponsible borrowing by consumers and irresponsible lending by banks rather than anything the Spanish Government did wrong?

    If talk about creating a new currency for Germany and its Northern European peers became serious, wouldn’t this spur a massive outflow of deposits from Spain’s banks into accounts denominated in the new currency?

    As depositors pulled their savings from Spanish banks to invest them elsewhere wouldn’t this dramatically escalate the Spanish banking crisis that lies at the heart of the problem that Spain is already facing?

    If Spanish depositors pull their accounts in mass, won’t the Spanish Government be on the hook to recapitalize the Spanish banking system to prevent it from collapsing completely? Won’t this require dramatic increases in expenditures by the Spanish Government which would drive up both the fiscal deficit and government debt even higher than they already are?

    Perhaps I’m missing something, but I don’t understand how cleaving the Euro in two makes things better; it seems to me, it would lead to an even worse banking crisis that would insure that things got worse not better. At least for Spain.

  • dearieme

    “saving Europe” != saving the EU.

  • Jacksonian Libertarian

    This looks like the desperate flailing around of someone about to fall off a cliff, looking for something anything to grab on to. When they should be looking for a soft place to land. The Euro is dead, bring back the national currencies.

  • higgins1990

    @Monty “It’s time for the Eurocrats to realize that the ‘common currency’ dream was stupid and abandon it. It was doomed from the start.”

    Liberals will never give up their religion. Never.

  • clau2002

    The name of this site say it all.Is the American interest for euro and EU to fail(DIVIDE ET IMPERA) and this is the reason for all this hysteria in the English language media.The real problem is simple:Trade means exchange of goods and currencies are used to measure it.EU is producing goods denominated in euro which are offered for exchange on the global market.The USA economy is 70%..”financial industry”(read speculative gambling and betting)hence the “goods”that are offered for exchange on the global market(products that back the $ bill)are fancy printed pieces of paper.We are told they have whatever value the sharks on Wall Street decided they have!The rest of the world seems not willing to accept that anymore and started to ask for real value”goods”from America in exchange for their goods.The euro has become the global alternative to the dollar and this triggered all the speculative attacks from the “markets”(read gamblers and speculators who delude themselves into thinking they are INVESTORS).This is your “debt crisis”.Compare the levels of debt of EU countries four years ago with those of today and ask yourselves where is the crisis!

    • Walter Russell Mead

      @clau2002: if you followed my work more closely you would know that I have long argued that the EU represents the greatest triumph of American foreign policy: it ensures that no European country can dominate the others and threaten the US global position, it is reasonably open to trade, and it more or less institutionalizes Wilson’s 14 points as the foundation of European life. It’s what we’ve wanted since 1776 — which may be why the US has consistently supported it from the time of the Marshall Plan.

  • Kris

    Quite right, clau2002; all we need to do is tune out Anglo-American hysteria and cynical fear-mongering. Tout va pour le mieux dans le meilleur des mondes, Madame la Marquise.

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