Today the sponsors of Britain’s $400,000 Wolfson Economics Prize announced the five finalists of a contest for the best contingency plan for a breakup of the euro zone. The most intriguing one is by a British private investor, Catherine Dobbs, who proposes to unscramble the euro currency, quite literally—replacing it with two brand-new currencies, which she calls a yolk euro and a white euro.
The yolk euro would be the currency of the weaker countries, presumably ones such as Greece and Portugal. The white euro would be the currency of such stronger nations as Germany, Finland, and the Netherlands. Seemingly ovo-obsessed, she calls her plan Newney, for New Euro White/New Euro Yolk.
The beauty of Dobbs’s plan is that people would not have a choice of which currency they would be given when the euro broke up. Everyone would get some of each. For every 100 old euros, people might be given 70 white euros and 30 yolk euros—and that ratio would be the same for all euro holders, regardless of nationality. Writes Dobbs: “The exit of one or more countries is not viewed as an exit, but a split of the Union into two (or more) regions.”
Why is that important? Because it would eliminate the incentive for panicky capital flight. There would be no way to protect yourself from depreciation by pulling your money out of Greece or Portugal or Ireland or Italy. No matter where you stashed your euros, they would be converted into the same mix of yolks and whites. So the plan could be safely announced well in advance. Most other ideas for avoiding capital flight involve secret planning, covert printing of new currencies, and so on in the (probably vain) hope of catching people by surprise before they can bail out.
Avoiding capital flight and an uncontrolled breakup is a big deal. Writes Dobbs in her contest entry: “One or more member states leaving the European Monetary Union, if this were to happen in a disorderly way could … be a five to ten times larger event for the global economy compared with the Lehman collapse.”
Dobbs’s plan might even make a breakup of the euro unnecessary. In the absence of a safety net, investors demand such high yields to protect themselves against the risk of a devaluation that countries can’t afford to pay the interest on their national debt, and do devalue, as feared. The plan provides that safety net by spreading the pain to all. So it might lower the borrowing costs of such countries as Italy and Spain, taking away some of their incentive to bail out of the euro zone. Writes Dobbs: “The real power of [Newney] might come from it never being used.”
There’s a lot more to Dobbs’s 49-page plan. Politically, the trickiest element is that it could not happen without the agreement of all members of the Economic and Monetary Union. That distinguishes it from an unauthorized, unilateral exit by, say, Greece. Each of the new currency zones, yolk and white, would have its own central bank with its own monetary policy. Presumably the yolk central bank would print more money, which would lead to higher inflation and gradual devaluation. If wages rose more slowly than domestic prices, competitiveness would improve. People who didn’t want the yolk euros would be free to swap them for white euros at an exchange rate set by supply and demand in the open market.
The Newney plan wouldn’t make the debt burden of Greece, Portugal, and the other peripheral countries disappear. In fact, as the yolk currency depreciated, the burden would grow, pushing sovereign and private debtors toward default. But Dobbs says renegotiation of debt is a separate matter that the market knows how to handle, as the recent Greek deal goes to show.
Policy Exchange, the British organization that sponsors the Wolfson Economics Prize, called Dobbs’s entry “an original and elegant solution.”
Dominique Strauss-Kahn, who resigned as International Monetary Fund chief in disgrace, was the butt of a joke at the London press conference announcing the prize’s shortlist. Derek Scott, who chaired the panel of judges, said Strauss-Kahn once declared that monetary union is like a marriage. Said Scott: “I’m not sure if this says more about his views on monetary union, or on marriage.”
The four other finalists are from Roger Bootle and Capital Economics; Jens Nordvig and Nick Firoozye; Neil Record; and Jonathan Tepper.