Veritas: How to scramble the euro-egg into an omelette
The euro could end up in an omelette.
Chaos over Greek politics; where new elections will be held in June; the level of bad loans in Spain’s banks portfolios at its 18-year high; recession in Italy where the economy shrank by 0.8% in the first quarter; and anxiety over unemployment figures in Southern Europe.
The single currency looks as fragile as ever and all the ingredients for a euro ‘frittata’ are ready to be scrambled, according to private investor Catherine Dobbs, shortlisted for the Wolfson economics prize with her 49-page paper ‘The Newney approach to unscrambling the Euro’.
The £250,000 prize is offered for the entry that a panel of judges deems to be the the best contingency plan for the break-up of the eurozone. Entrants have to answer to the following question: “If member states leave the economic and monetary union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?”
Dobbs suggests the single currency could be divided between white and yolk, just like an egg. A very expensive process, which could be felt by the economic system as five to ten times larger than the Lehman Brothers collapse.
Policymakers, Dobbs warns, need to develop a “plan B” for how one or more countries could leave the Union so as to minimise the shock to the members and to the whole global economy.
Dobbs suggest a plan called Newney, based on the the principle that all euros in the Union are considered as equal and on the assumption that the exit of one or more countries is not viewed as an exit, but as a split of the Union into two regions.
The regions are to be called White and Yolk each using as a currency the New Euro-White (NEW) and the New Euro-Yolk (NEY).
The Yolk needs to restore competitiveness through devaluation, which can be achieved by a central banks’s agreement on exchange for a fixed combination of the two currencies for every euro.
Dobbs’ approach allows for the automatic redenomination of currently euro-denominated assets, contracts and liabilities.
“The equal treatment of all euros removes the incentive for the speculative capital flows that could easily destabilise the Economic and Monetary Union,” she writes in her paper.
But, she adds, NEWNEY could also support the eurozone survival as it reduces the risk of destabilising speculative capital flows.
“The real power of NEWNEY might come from it never being used,” she says.
This is something towards which policymakers are working.