Debating a Eurozone Exit Strategy

Yanis Varoufakis has an interesting exchange with Warren Mosler and Philip Pilkington, responding to their thoughts on the ideal path for a nation intending on breaking away from the euro.  The Mosler-Pilkington “plan” (clearly gunning for the Wolfson Prize) is basically this:  (1) the government in question starts using the new national currency as a means of payment (paying public salaries, etc.); (2) the government announces that tax payments must be made in that currency.  The merit of this approach, they say, is that it is “hands off”:

Should the government of a given country announce an exit from the Eurozone and then freeze bank accounts and force conversion there would be chaos. The citizens of the country would run on the banks and desperately try to hold as many euro cash notes as possible in anticipation that they would be more valuable than the new currency. Under the above plan, however, citizens’ bank accounts would be left alone. It would be up to them to convert their euros into the new currency at a floating exchange rate set by the market. They would, of course, have to seek out the currency any time they have to pay taxes and so would sell goods and services denominated in the new currency. This ‘monetises’ the economy in the new currency while at the same time helping to establish the market value of said currency.

Varoufakis, with a nod to his Levy Institute policy note “A Modest Proposal,” suggests that it’s not too late to save the eurozone project.  Although jumping ship in the manner they describe might end up being necessary at some point, says Varoufakis, Mosler and Pilkington are underestimating the severity of the fallout from a euro exit (for the country jumping ship, and for the countries remaining in the boat).  Here’s a taste, from Varoufakis: 

The banks will run dry and will not be kept open by the ECB. Which means that the only way Ireland or Greece or whoever adopts this plan can keep its banks open is if they are recapitalised in the new domestic currency by the Central Bank. But this means that bank account deposits will, de facto, be converted from euros to the new currency; thus annulling the beneficial measure of no compulsory conversions of bank holdings into the new currency …

… even if one country exits the eurozone in this manner, the eurozone will unwind within 24 hours. The European System of Central Banks will break instantly down, Italian spreads will hit Greek levels, France will turn instantly into a AA or AB rated country and, before we can whistle the 9th Symphony, [G]ermany will have declared the re-constitution of the DM. A massive recession will then hit the countries that will make up the new DM zone (Austria, the Netherlands. possibly Finland, Poland and Slovakia) while the rest of the former eurozone will labour under significant stagflation. The new intra-European currency wars will suppress, in unison with the ongoing recession/stagflation, international and European trade and, therefore, the US will dive into a new Great Recession.

Read Varoufakis’ entire breakdown here.

Mosler and Pilkington have responded to Varoufakis here.  They agree that remaining in the eurozone, even with continued austerity, is preferable to an exit right now, but take issue with Varoufakis’ portrayal of the consequences of their particular exit strategy.