Understanding the Euro with Buck’s Fizz September 10, 2011 at 4:39 pm
The first scenario is disintegration: the reversal of the process of ever greater European economic integration and cooperation. In this scenario neither core nor periphery member states are prepared to meet the costs of staying together: German, Dutch and Finnish taxpayers refuse to sign up to the rescue of the profligate South, whilst in the periphery austerity packages founder on the rocks of collapsing output and/or political instability…
A second scenario can be traced, in which further integration provides the Eurozone with the necessary policy instruments to address the imbalances and weaknesses revealed by the crisis. What exactly would this integration involve? The most immediate problem – the risk of sovereign default in the periphery – will inevitably require a degree of burden-sharing and risk-pooling, most likely through the emission of Eurobonds backed by the governments of the entire Eurozone.
I agree entirely: this second scenario seems to me the most likely. There is a third, though, and that is where Buck’s Fizz come in. Various individuals have been in court recently disputing who has the right to use the Buck’s Fizz name. This of course followed various band members leaving, new ones joining, and more attempts at cashing in that you get at the average small town ATM.
So, what if instead of one country leaving the Euro, a split was amicably arranged? The North is rent asunder from the South. In the Neuro block we would have Austria, Belgium, Estonia, Finland, France, Germany, Luxembourg, and the Netherlands. The Seuro would be currency of Cyprus, Greece, Italy, Malta, Portugal, and Spain. Ireland, Slovakia and Slovenia might go either way, and the new accession countries could make their choice too. Both currencies would float; the ECB could remain as the central bank of the Neurozone, while perhaps Rome would be a good location for a newly created central bank of the Seurozone. On the day of schism the two blocs could agree that 1 Neuro = 1 Seuro, but this would rapidly change as the FX markets got to work. The Seuro would fall, restoring competitiveness to its members, while the Neuro would rise. If you got problems with pesky bondholders claiming that the split was a credit event, both blocs could even keep the name Euro; if two different bands both calling themselves Buck’s Fizz can tour at the same time, two currencies with the same name shouldn’t be a big deal. Vive la Rupture!