How to exit the eurozone, or Lord Wolfson, how about fifty quid for a blog post?

There is no easy way out of the eurozone, as Tim Harford explains with eloquence and good humor.  But here is my best guess at Wolfson’s query:

1. Issue a surprise announcement that all euro deposits in Ruritania will be converted into pesos (or whatever) at a new and lower yet defensible rate.  If I try to withdraw my ten euros from my bank, I receive an IOU for ten pesos which is worth say six euros.  Over time the government will replace these IOUs with a new paper currency.

2. Let physical currency euros leave the country, and stress they will be honored, in any case they are not easy to confiscate or convert.  And a country may need them as a partial money during the transition.  Not trying to confiscate them will mean that a lot of the euro currency stays.  There will be a dual currency regime for some time to come, but the medium of account will become pesos not euros.

3. If you borrowed money denominated in euros, from a Swiss or German bank, that is between you and them.  Obviously a lot of borrowers will be in partial or total default, given the whack to their bank accounts.  Let the northern nations bail out their banks, they won’t send tanks to extract the funds from good ‘ol Ruritania.  Who knows, the rest of the eurozone might be prompted to set up a sensible bank resolution mechanism — working through the ECB of course — though don’t count on it.

4. The assets of Ruritania banks, namely loans to Ruritania citizens, will be redenominated to pesos.  Labor and rental contracts will be redenominated too.

5. Nationalize parts of the banking system if need be, so much the better if you can pass on this one.  If the bank is essentially empty, that is a deflationary shock.  Have the government take over the bank and fill it with new printed money to restore deposits and counter the deflationary shock.  If the country cannot trust its nationalizers, they should just print up more pesos and nail them to the bank balance sheets, risking the resulting corruption and drain of funds.

Are we on track so far?  The consumption of imports will fall I believe.

6. What about default?  If your country is running a primary surplus (Italy yes, Greece no), partially default on your debt but make strict promises to resume payments ASAP.  Capture some wealth from the foreign banks and start the game all over again.  Without a significant primary surplus, the (temporary?) cessation of foreign borrowing would mean that the country has to cut government spending further.  Make a political judgment here but consider not defaulting; default may be unavoidable for Greece in particular but you can’t blame my plan for how deep in the hole they are.

Let’s sum up which problems have been addressed and which not.  The domestic banking system is saved, at least provided the new conversion rate is credible enough that no one expects a repeat of the depreciation.  It’s key to make that first announcement a real surprise, good luck!  A negative wealth shock will come anyway and my plan has accelerated the arrival of that shock; the best one can do is to combine it with monetary expansion and the positive export shock from devaluation.  To fix the external banks, the wealthier countries will need to exercise and perhaps improve their LOLR powers, but that is the case under any plan, not just this one.

Admittedly this plan makes the wealth loss in Ruritania quite transparent, which may be politically unpopular, but that transparency eases the economics of the transition.

Voila!  Rinse and repeat as necessary.  A lot of this would be eased by high inflation from the eurozone itself but a) that would involve collateral costs on the healthier economies, and b) in any case it doesn’t look like it will happen.  I’m sticking with what a small country can do on its own.

No need to write in the comments section that this is “illegal.”  Breaking the three percent deficit rule, as France and Germany did, was illegal too.  Ruritania will not be hauled before a court of law and I also predict Ruritania will not be ejected from EU per se.  Maybe their agricultural subsidies will be cut, let them eat floating exchange rates I say.


Way easier than that. Just look at what happened in Ecuador when they dollarized. By announcing a currency change you do most of the work of a currency change.

"It’s key to make that first announcement a real surprise, good luck!"

But the inability to make it a real surprise is the key problem:

For countries with euro-peg you just need to announce unpegging and that everyone has option to convert their euro-denominated debts to their new currency if they so wish. It's really super-easy.


Thanks a lot Tomasz. PS how to escape from jail? Assume you have wings.

What impact do you think this would have on other small countries in a similar position in the Eurozone? Surely they would experience an immediate massive bank run and couldn't pull the same trick.

I was going to make a half-snarky post about how Greece should just cut their government by 40%, but then I saw the time stamp on this post.

What are you doing up on a School Night at 3 am posting on the interwebs? Don't you teach? What's your Monday schedule look like?

Tyler Cowen doesn't sleep. He waits.

He's probably in Rome again, or Ruritania.

He's stated he has a blog software feature that automatically posts at a certain time. He does this to thrill his Euro-time zone readers.

"4. The assets of Ruritania banks, namely loans to Ruritania citizens, will be redenominated to pesos. Labor contracts will be redenominated too."

And all debts, and rents, and so forth?

Good point. Hungarians with Swiss-denominated mortgages approve.

Why wouldn't Germany exit instead? Other smaller strong countries could perhaps coordinate along with Germany, or follow and peg later. France can then become leader of the new southern block. No conversion necessary which would cause a lot of problems.

There would be a lot of upheaval, uncertainty, and short-term problems for whoever changes currencies. Germany also has far more to lose than one of the weaker countries in terms of influence and relationships with its partners. Why would Germany want to bear these costs? Are they being held back economically by the weak countries enough to make it worthwhile?

That does not sound too bad. Get digging I say:

The appropriate losses and punishments are there, fairly equally spread and containable. The outcomes are relatively predictable and not too frightening. Nature takes its course. But every plan, even an exit plan, needs a czar to administrate. Lord Wolfson could give you £1000 to pay for several months worth of ethnic dinning. The remaining £249,000 would pay the salary (distributed in performance-conditional installments over 12 months) of a squeaky clean conversion czar (citizen of Ruritania preferably though not necessarily, see writings of Paul Collier) vetted by Wolfson and Policy Exchange. One caveat, any ‘nationalization’ of banks be treated as a constrained utilitarian safety-net mechanism to establish deposit taking and micro/meso lending entities, leaving all significant risk thenceforth in the private sector. Also, require re/deregulation for liberalization and FDI in financial sector to take up the slack, with a Vickers style separation between investment and retail. Finally, (I have to say it) if there *had* been *enforceable* parametric (simple/few) fiscal/monetary and utility rules in place things would never have got to this stage. So no need to gloat about the illegality of the exit plan! Only other worldly libertarians exercise their human right to torture themselves mercilessly about enforcement.

If they don't carry out the plan soon, won't all the Greek banks be empty?

"Greek newspapers have also reported that people flying abroad - including nuns, priests and the unemployed - are being stopped at Athens airport with suitcases full of euros."

But why are the wealthy having to route funds through Cyprus and why is anybody being stopped at the Athens airport? Did I miss something? Have controls already been imposed on euros being taken out of the country?

Yes, that's what I don't understand. Why not wire the money?

Unless the cash is being moved from one safe deposit box to another....

Not exactly bingo, but close enough - it isn't a bank run, it is a tax run. Greeks aren't really poor - after all, owning the world's largest merchant fleet is not exactly trivial (apparently 50% of all EU ships, 18% worldwide, with a particular focus in tankers and bulk good carriers) - but they don't pay taxes.

And there is a worldwide network of people who speak Greek who understand the particular needs of Greek money seeking a new home beyond the threat of being taxed (any port in a storm, after all - and Greeks are well represented in any number of ports). Though it tends to be a service which requires a certain amount of untraceable currency to function - luckily, those 500 euro notes are well suited for just such transactions (what, does anyone think that printing such large notes was an accident on the part of the ECB?)

Greece's crisis is about fraud and a marked lack of interest in paying back anyone stupid enough to lend to Greece - pretending otherwise is just silly.

Argentina did it in early 2000s when thy broke the 1 to 1 exchange rate with the dollar. The result: a transfer of assets from the population to the goverment.

Actually I had this doubt about the proposal too, though I suppose it goes under the heading of devaluation and what you make of that. But Sergio you will remember that the rationale for establishing currency board in Argentina (a measure of desperation) was to find some way of disciplining government spending. The tzar who set up the currency board was the same man who pulled it down, D Cavallo. He was as fallible as any other human, but his ideas and his technocratic team were better than any other on offer, and he must have felt the sense of pain and failure like every other Argentine.

It would be better to avoid the situation ever arising. The whole point was that once the exchange rate was fixed and government spending capped, Argentina would undertake structural reforms such as freeing up labour markets in order to make the economy competitive. This did not happen. Has not in Italy or Greece or Spain or Portugal either.

Instead, following 1995, there was a reversion to undisciplined expansionary macroeconomic policies. So D Cavallo, who had been forced out of office for pushing for several of the right kind of institutional reforms and combatting corruption, was eventually brought in again under another President to administer a new monetary medicine to counteract the first. Here again however the second medicine (breaking convertibility) had competitiveness as its overall objective.

I personally know ordinary people who lost a hell of a lot of purchasing power in 2001, though in Argentina it has always been thus. Tragically you could see an effective transfer of assets to government at the moment of currency conversion (I don’t know if this is inevitable) as correcting flaws of the taxation system in Argentina and Greece at one stroke.

The choice is federalize the European monetary union or break up/off. Both are difficult but neither need be catastrophic. The danger of delay is the bad blood coagulating because of unreasonable pressure for a deal between incompatible economic ideologies and national interests. If it’s a break up then either the surplus countries leave first, or deficit countries do. Tyler Cowen looked at the latter option. The people meeting in two days apparently refuse to talk about it.

when a government won't raise the usual taxes, they tax their bond holders (and their population as well) via inflation.

Right, the depreciation did produce inflation. By the way, interesting post you have there on Schumpeter & Rogoff (!)

Step 0. Get approval from Germany and France (and maybe UK) to do this.

Otherwise, how do you deal with the German citizens (and companies) who have euro-denominated debts from citizens (companies) from Ruritania? They will sue and, if Germany and France want to, it will be found to be illegal. In Europe, legality is very important, if by legality you mean "Germany and France approve."

For political economy reasons I don't think any solution is possible which leaves Greek people having their savings reduced in value overnight. Why couldn't we have a solution where Greek people keep their savings in Euros, but start to get paid in new drachma? For the public sector this would be easy to introduce, and legislation could force private sector employers to pay in new drachma too. Retailers would then have to offer their goods denominated in the new currency, and it would have been introduced without any need for a) surprise, and b) so visibly cutting the savings of its citizens.

Czech/Slovak republic split currencies in '93 without any big problem; and that even considering that the lower value of slovak currency was predictable. I think you can split currencies easily if you are not in crisis. Seen from this way, Germany can exit eurozone much easier than Greece....

Some comments -
'but the medium of account will become pesos not euros' Just like the euro was, between 1999 and 2002. Does anyone remember that? I guess it helps to work at a German ERP software company (no, not that one) - it isn't hard to handle, especially since just about everyone's software can still handle this.

And the 'medium of account' will be strictly domestic, for a very pragmatic reason - euro 'denominated' transfers do not have any additional (that is, non-domestic priced) fees when transferred throughout the EU - Ruritanian based entities, just like those in the UK, Denmark, Hungary, the Czech Republic, etc are likely to continue to use the euro to escape the charmingly named cross-border transaction costs (in simpler terms, nasty fees and exchange rate charges of around 3%-5% before introduction of the euro and various regulations forced banks to stop charging them). Ruritanian entities, assuming the nation remains in the EU, will continue to use the euro in all non-domestic transactions, assuming that Ruritanians involved in any non-domestic economic activity can do the same math which was routine 15 years ago at any company which sold outside of its domestic market, before the euro was introduced. (As a matter of very cynical fact, one could argue one reason that a certain amount of euro criticism is directly related to the bottom lines of those institutions that lost a very lucrative source of fees and charges after the euro's introduction.) Of course, exchange rate risk will still exist by conversion to euros - unless those companies involved in external trade simply keep their euros in euro accounts, which they will, assuming the country remains in the EU.

'If you borrowed money denominated in euros, from a Swiss or German bank, that is between you and them.' Well, maybe Swiss, but the EU will definitely have something to say about how EU members treat other - after all, it is pretty much all the EU exists for, in the end. Which may also explain a bit of the confusion often found in American reporting about the 'euro crisis' - the Greek problems concern both the EU and those EU countries which are in the eurozone. All 27 member states have to agree on the plan to deal with Greece, for example - 10 of which don't even use the euro as legal currency, by the way (two of those nations being adamant in their rejection of the euro - though ironically one of them pegs their currency to the euro, and most of the remainder not meeting the necessary criteria at this point).

'Let the northern nations bail out their banks, they won't send tanks to extract the funds from good ol Ruritania.' Excluding a nation from the EU would be at least as destructive as sending in tanks - just ask the Serbs, and compare their answer to that of Croatia or Slovenia. The EU is about carrots (like barrier free access to the world's largest single market and all its subsidies), not sticks. Europe tried the stick method, the latest example again being the Serbs - who came up empty handed after slaughtering many thousands of innocent people.

'No need to write in the comments section that this is "illegal." Breaking the three percent deficit rule, as France and Germany did, was illegal too.' Laws are written and rewritten all the time - the EU has never been anything but a way to use compromise to avoid conflict. It is the European Union, not a reflection of someone else's vision of what Europe is. (This remains probably the largest problem for the UK - they want the undeniable benefits of membership, but don't really consider themselves to be part of the Continent.) What is interesting is the current talk in Germany of having the European Court have the power to enforce laws as written in terms of the euro - this is a fundamental change in attitude in terms of each nation reserving the right to ignore the EU when it wants (Germany, with its totalitarian past, is actually one of the biggest offenders - Germans refuse to give up privacy/data protection concepts as found in the Grundgesetz just because the EU is demanding data retention. Not so oddly, Germany's commitment to avoiding practices from its past as a way to ensure a democratic society are met with a certain understanding on the part of other EU members.)

In other words, this 'crisis' isn't just about the concerns of English speaking financial interests - which is one reason that Sarkozy was so brutal to Cameron, because really, the UK is welcome to leave any time it wishes. But as noted above, the benefits of being in the EU are too great (unless one thinks Tory fantasies of Britain's glorious past have any relevance in today's world).

Thanks for the tip Tyler, I'm preparing ... as a citizen... ;-)

@prior_approval wrote
" Laws are written and rewritten all the time – the EU has never been anything but a way to use compromise to avoid conflict. It is the European Union, not a reflection of someone else’s vision of what Europe is. "

Nonsense. The three percent deficit limit - stability pact- was the law when countries were cajoled and forced into the euro throught the Maastricht and Amsterdam treaties. That France and Germany formalized their breaking of the law does not make breaking the law legal. I was a citizen of the European Union at the time, and the stability pact was my vision of the euro - though I was stil opposed to it.

Legislation is only law so long as they people with the guns actually enforce it.

Your plan will run into some very large problems if the "new and lower yet defensible rate" is zero. Then when you try to withdraw your ten euros from your bank, the ten peso IOU you receive will be worth zero euros. The government will not be able to replace these IOUs with a new paper currency when these IOUs are worthless to begin with. In short, in an attempt to leave the eurozone, a bankrupt state could very-well lose its ability to create money.

Your advice is much the advice given by the IMF to e.g. Tajikistan upon the disintegration of the Soviet Union. "oh no, how can you abandon the Soviet ruble? Your "Tajik som" will be worthless!" Tajikistan wasn't really in great shape at the time, as there was an interethnic civil war going on et cetera (a condition which I believe applies nowhere in the Eurozone). Similar warnings were given to Belarus, Armenia et cetera.

Unfortunately for your argument, a state that has lost its ability to create money is not a state, it is a gang. Every state on Earth - Haiti, Mali, Afghanistan, Tajikistan included- collects taxes in a currency and that state determines which currency it will accept in settlement of tax liabilities.

Fearmongering has its place, no doubt, and it's important that people with last names like "Merkel" and "Koning" continue to call the shots in the Eurozone, no matter what arguments need to be fabricated to underpin their supremacy. But this is an English speaking blog, so those arguments won't wash here.

ok It's got a point, ears is Oil Painting blog China FAQ

Good post, but I'd call the country Freedonia.

Comments for this post are closed