So if Europe’s leaders could just take a step back and realise that their currency isn’t really a currency, they could perhaps convert it into what it most closely resembles – a European SDR – and reduce at least the government-mandated part of Europe’s modern tragedy. This would not be painless – any more than divorce is cost-free – but it would be less painful than enduring today’s continuing extreme crisis.
The first step would be to re-introduce national currencies as sub-species of the euro on a one-for-one parity with the euro, and to denominate all debts in them: Greeks would owe debt in euro-drachma, Spaniards in euro-peseta, and Germans in euro-marks. Then the market could be allowed to revalue these sub-currencies – which would drive down both the exchange rates and the debt of the PIIGS.
After a period of free movement when national banks would need to be recapitalised by national governments (since the value of, for example, German bank holdings of Spanish and Greek debt would plunge), the exchange rates could be frozen once more, and the euro would then become the reference currency for international trade within Europe, and between Europe and the rest of the world. The Maastricht rules against deficits, which are currently applied to government deficits, would then be directed instead at trade deficits – though with the possibility of devaluation if a country ran persistent trade deficits.
This shift could be undertaken in concert with or after the “modest proposal” that Yanis Varoufakis and Stuart Holland have long championed, and have just recently had republished in the Financial Times online. This would convert bonds issued by the nations of Europe into bonds issued by the European Central Bank, up to the 60 per cent of GDP level currently allowed by the Maastricht Treaty. These bonds would continue to be serviced by the relevant nations, but with the backing of the ECB the rates on those bonds would fall dramatically:
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