Next weekend we will see if eurozone will turn to be the largest poker table of the world. If Syriza wins the greek elections and gets enough support to form a govern, the poker game will start. As Alexis Tsipras Syriza’s leader said recently, both Greek and Germans have the nuclear button, but none of them shall push the button. Much has been said about the terrific consequences for both parts is a Grexit in fact materializes.
Here I will present a different approach. One may wonder way a currency union cannot breakup orderly? In fact, one of the main motivations from one country to leave is to be able to devaluate strongly its currency and be able to adjust its external balances, turning its economy more competitive. The disorderly way is, as usual, make things happen by surprise, overnight (or more frequently, over weekend). In this way, all the economic agents don’t have the chance to prevent themselves to the devaluation of the local currency. But in the case of the Eurozone this may not be the most appropriate solution, because economic agents from other fragile economies will sooner than latter start to prepare themselves for a similar scenario in their domestic economies and will create a chain of the events that will stop only with the complete breakup of the Eurozone.
So, this time ,the approach need to be different. How? Eurozone need to negotiate with Greece an orderly Grexit, in such a way that economic agents don’t get rewarded by start bank runs and opening bank accounts abroad. One orderly process must be created that allow any country to leave the Eurozone, step by step, along several years, allowing economy and agents to adapt smoothly to the new conditions. One kind of the process a country may follow in order to join the Eurozone shall be put in place for any country that wants or needs to exit from Eurozone.
The features of such a roadmap to a Grexit are not easy to design, but I think that one of the most important issues should be to peg the new currency to the euro. This peg should be agreed by Greek authorities but guaranteed by the ECB, because it is the only entity able to secure the value of the new drachma against the euro. Off course, this would come as a additional cost to the ECB, but a little cost in order to save the Eurozone. Off course, a peg doesn’t imply that the currency will not devaluate. It’s necessary that the devaluation occurs, but not overnight but along a multi-year period, let say 8% each year during 3 years. The capital flight could be stopped if the new national currency offers an interest rate of 8%, so local depositors will get paid for the devaluations. If this can be done, with wages moderation in the economy, it will become more competitive each year, and local agents will not face huge purchasing power losses overnight. Although, inflation would also next to the level of 8%, and wages shall be maintained frozen. That is the adjustment that is necessary to the economy. Some people may want to emigrate, but that is healthy for the domestic economy. And most importantly, there is not a major will to take capitals out of the country, and this environment of programmed currency devaluations are not a problem for economic agents, as the uncertainty is removed from the picture.
Most importantly, economic agents from other fragile economies would be less nervous because they would know that if the country where they do business will have one day to leave the Eurozone, the process will be conducted in an orderly way and they will not feel need to take capitals out of their countries sooner than latter anymore.
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