I read the five shortlisted entries for the Wolfson prize yesterday. The essay competition asked authors to assess how to manage the process if member states left the Euro. The five published yesterday showed ingenuity and offered a range of utopian solutions. One suggested creating two new currencies, called the New Euro-White, and the New Euro-Yolk. Another offered a new ECU-2 basket currency. A third proposes an Exit task force with a Task Force Charter driven by Germany. It is difficult to take much of this seriously. The media has decided to trivialise the whole topic by concentrating on a picture of a pizza drawn by a 10 year old. The other two are less fanciful, but do not tackle the big issue of how exit can be arranged at speed and legally when the current Treaty does not have a mechanism for exit, and when no country is seeking exit.
Over the next few days as the run of news permits I will set out what I think might happen in the real world of EU politics and fast moving markets. Anyone forecasting the future of the Euro needs to begin with a firm understanding of the nature and importance of the project to EU member governments. The critics of the Euro mainly lie outside the Euro member states. The governments of the 17 members all regard this as a central political project. They see the economic problems within their economies as being a price worth paying for the progress to political and economic union that the single currency represents. Many, indeed, believe the official line, that the problems of state debt and unemployment have solutions within the Euro framework. They do not blame the currency for state spending levels or joblessness on the periphery of the zone. They believe they need to work away at Euro discipline for it to come right.
The Greek, Portuguese and Irish governments are firmly wedded to the Euro. They are not seeking a way out. Whilst there are now some senior establishment figures in Germany and the Netherlands who might like to see Greece leave, their governments still want to keep Greece in if possible and all agree that the Euro must continue.
The Treaty does not allow the other member states to force a country out, nor does it allow an individual member state a right to exit. Those essayists who have thought of this issue state that it would require Treaty change to allow or force the exit of one or more members. How likely is this?
It is my view that the Euro members will all wish to keep their currency going for as long as there is any chance of doing so. I detect no wish to plan an orderly exit for the most stressed countries today whilst the markets are temnporarily calmed by the large injection of ECB money. I do not expect to wake up soon to negotiations over the creation of one or two new currencies with the complex Treaty changes that would require, nor for an emergency exit which they did not put in place in calmer times. No-one is clamouring for new currencies based on unscrambling an egg, with easter titles. Whilst an emergency exit is always a good idea in case a building catches fire, trying to knock one through when the fire has started might just fan the flames more quickly. The countries that fear they might be forced out would not sign up to any such clause willingly. They need all 27 EU members to vote Yes, and for positive referenda results in some member states.
So what would trigger the exit of say Greece or some other country? I could only see it happening if an unwelcome crisis forces it. I could see three possible scenarios that might force their withdrawal. I hasten to add I do not wish any of these scenarios on a Euro member state , and do not think it inevitable that one occurs. It depends how flexible and creative the authorities are to inspire some growth in the economy, and how generous the neighbours are when it comes to loans and transfer payments to weaker members. The scenarios include:
1. Another intense phase of crisis in the markets, threatening banks, underlining the continuing need for special funding beyond the currently agreed packages, with or without the spread of uncertainty to the Euro itself and with damage to the credit standing of all Euro instruments and the value of the currency. If the stronger countries have to pay a much larger sum to keep Greece going, this could cause doubts about the sustainability of the scheme and the credit worthiness of other countries and banks. If calculations of the scale of transfers needed to the weaker members starts to erode confidence in the stronger members that too could force a rethink.
2. A massive move to hostility to the Euro by the electors in a weaker state, who up to this point have broadly suported the currency and in the case of Greece allowed a pro Euro technocrat government to take over. If the electors refused to vote for parties wishing to keep the Euro that could force a change of approach by a future government.
3. An intensification of strike and protest action on the streets on a sustained basis so that government reaches the conclusion that it can no longer govern and protect the Euro scheme policies.
If any of these developments occur, the EU could reach the point it reached with the Exchange Rate Mechanism, when it decides the markets have won and will force policy change. In these conditions the EU will need a simple, quick plan for the early exit of say Greece. There will be no time for agreeing and ratifying Treaty changes. I will tomorrow deal with a legal exit under the Treaty.