YOUNG JURRE HERMANS DECLARES GREEK DEBT IS JUST A PIZZA!

A Wolfson Economics Prize worth $390,000 has been awarded to Capital Economics for the best plan for dealing with member states leaving the eurozone. The plan proposed by Roger Bootle and his team calls for on an orderly break-up implemented if a struggling EU member was epelled from eurozone.


Olli Rehn asserts more action is needed if policymakers wanted to avoid a disintegration of the eurozone. We need both a genuine stability culture in the eurozone and its member states and a much upgraded common capacity to contain financial contagion and reduce the borrowing costs for its members.

Hans-Peter Friedrich declares Germany is prepared to help rescue Greece but only if it helps itself and honours its agreements, as Germans are not willing to pour money into a bottomless pit.

Greece should disclose its plans just three days before acting, preferably on a Friday. The new national currency should be exchanged for euros on a one-for-one basis, and all wages, prices, loans and deposits would be redenominated one-for-one. 

One of the countries currently being affected by contagion through higher spreads on its national debt is Italy, where Mario Monti has introduced a number of reforms in recent months to rein in public spending and revitalize the economy. Monti urges his European partners to speed up measures to limit contagion from the debt crisis and stimulate economic growth, noting that Italy is being affected because of the overall weakness of the system, more than for any specific weakness of the country.

Unless actions were taken to stem such contagion, policymakers risk a backlash from voters everywhere that would undermine the culture of stability that Germany in particular has sought to promote within the European Union.

People may disagree on whether leaving the euro is a good thing, but the contribution of the Wolfson Prize has been to demonstrate that it can be done. The government should redenominate its debt in the new national currency and renegotiate its terms, which would include a grand haircut.

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If Greece were expelled from eurozone, whatever private-sector entities that haven't yet defaulted would in the end default because their debt would be denominated in euros and their revenues would be denominated in the new drachma. They wouldn't keep the competitiveness gains for very long because the ensuing inflation would eat it alive.

There is an increasing probability that eurozone will break apart, or even euro will be abandoned altogether. The warning signs are mounting, and fresh news is adding to the gloom every day. Financial watchdogs all over the world have instructed banks to brace for a possible break-up of eurozone. Banks are conducting stress tests to prepare for this worst-case scenario.http://venitism.blogspot.com

Simon Wolfson points out there were multiple attempts to stabilize the euro but nothing has been done to address structural problems of the stricken economies. The European treaties don't envisage nations leaving eurozone, but a country can quit Fourth Reich and eurozone together. Such a departure would take a long time, and investors could use that time to withdraw their capital. So the country in question would suffer economic damage on its path back into a national currency. 

It is unclear what would happen to a country's sovereign debt if it left eurozone. The decisive factor would be whether the country had borrowed money under national or international law, and that varies from member state to member state. Germany has issued only 0.2 percent of its debt under international law, while the figure for the Netherlands is 40 percent and for Portugal 60 percent. The bonds would become the subject of legal disputes which would cause lasting damage to investor confidence in the countries that issued them. Investors are already worried by these factors. 

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When a currency is abolished, there are always victims, including many citizens whose savings are suddenly worth less. History shows that the collapse of currency unions is often accompanied by unrest or even civil war. It is virtually impossible to imagine a breakup without severe social consequences.

The prize sponsors also awarded a special mention to an 11-year-old Dutch boy. Inspired by a simple pizza, he proposed a solution for Greece to exit the euro. Young Jurre Hermans says the Greek man gets back Greek drachmas from the bank, their old currency. The bank gives all these euros to the Greek government. All these euros together form a pancake or a pizza. Now the Greek government can start to pay back all their debts, everyone who has a debt gets a slice of the pizza.

Should a weak country like Greece pull out, a panicked reaction by its citizens is to be expected. In expectation of currency devaluation, hundreds of thousands of people would likely clean out their bank accounts, creating a run on banks. People would subsequently try to put their money in foreign banks. A capital flight like this would finish off banks that are already in distress.http://venitism.blogspot.com

Were the entire eurozone to dissolve, even a strong country like Germany would suffer. In this case each former member country would have to establish a new exchange rate for their new currency. Europeans would then have an incentive to swap their remaining euros against a strong national currency, like the deutsche mark. Thus Germany would attract piles of capital, in turn increasing inflation pressure. 

Libertarians feel a deep sorrow that things could develop like they have in eurozone considering that the fundamental mechanisms at play now were there for everybody to see. It had been obvious to libertarians from the outset that a single interest rate for 17 countries with different inflation rates was a recipe for real estate bubbles and banking crises.

A single-currency area without central decision-making or fiscal transfers and coordination of budgets by federation was bound to lead to trouble. The sadness is that, in spite of that, this was allowed to happen. Millions and millions of people are suffering. The European cooperation project is suffering, and a crisis of legitimacy has resulted.

Greece and the rest of the eurozone have no rational future unless they can reclaim control of their own currencies. An end with horror is better than a horror with no end, the horror that is now ahead of us for the unforeseeable future.

Europe's politicians don't want to look beyond the end of their nose. A kleptocrat thinks of the next election, but a statesman thinks of the next generation. Today we need statesmen more than ever, and if it's statesmen making the decisions here and now, then Greece's exit must begin now.

Monetary union had to be embedded in a political union. They didn't know what they were doing when they started this thing, and they still don't know what they're doing. But if it collapses, it's going to be hell. It was relatively easy to enter; it's going to be much more traumatic when it breaks up. Greece's default is inevitable. Greeks would be foolish if they were to continue to pay that. The burden is just unsustainable.

The only way out of the crisis is either to dissolve eurozone or for eurozone to go down the path of fiscal union, entailing a single ministry of finance, mutualized sovereign debt, euro bonds, and major budgetary transfers from richer to poorer eurozone members. In other words federation, fast political union as you have in the United States, which means enslavement to Brussels. 

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