“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.