In my previous PolicyMic article on the travails of the euro zone, I explored the idea of splitting the monetary union into a euro A and euro B zone, with the intent of having Portugal, Ireland, Spain, Italy, Greece and potentially, France, in the latter group. The benefits are that the debt contagion would not infect the fiscally healthy members, the problematic countries would enter a controlled descent on the way to recovery, moderate inflation would devalue the debt and stimulate the productive capacities, and would ultimately pull the euro zone from the brink of collapse.
My readers left very tantalizing comments that pushed me to explore this idea further. PolicyMic writers Jeanne Vickery and Himanil Pandya raised the problems of trust and control of corruption – fundamental ingredients to any solution in Europe. Jed Chancey reiterated the established libertarian positions, which probably hints that the solution is supranational in nature. Cory Suter talked about keeping the euro, but in the context of competing currency systems. Ed Hancox raised the practical issue of investor demand in the euro B and Germany having to back the value of euro B, all the while the possibility of a Greek exit looms more real – not unlike the position of David Gray. Douglas Goodman gave an interesting parallel with dual-currency border towns and Romain Champetier raised the point that the state remains the best known form of social organization and is consequently perhaps the vehicle for the resolution. Olga Ramos rounded off the discussion with the idea that printing money would be a stabilizing factor in the European crisis.
The challenge is to mix these connected ideas into a coherent hypothesis. A split euro and a controlled descent would certainly help in restoring confidence all around – in investors and the public, given that it would provide some predictability that the euro zone will not collapse. Unity governments and painful accountability reforms might be the political price for such an arrangement. A second euro would yield to some of the pressures pushing on the euro zone, but cannot ever be as flexible as the competing currency system Suter highlights; moreover, its value may be fixed relative to euro A at an intentionally devalued rate to give room to inflation. Ed Hancox presents an interesting case for investor behaviour, but one must consider what the impact on the dollar will be, given that it may be cheaper from the ongoing printing by the Fed and the recent announcement that China and Japan dropped the greenback as a median for bilateral trade. The risk of a Greek exit remains very high, but what makes it unlikely is that the legislative, political, and economic harmonization between euro zone members is such that it is doubtful any member can be outside of it without fundamental and chaotic realignments. This level of integration is the main argument against the exit of any member, however painful it is to keep them inside.
Dual currency border towns are an interesting model, but its limited application is its main handicap. One might look at a country in hyperinflation, in transition towards a reset of its monetary system – for a while, the inflated and de-valued currency is used at ratios that make them equal, until the re-valued currency becomes the only one. This sort of model may offer a practical application of how the euro crisis will play out without the need to dissolve the euro zone. States would need to unite around the supranational solution to manage the crisis with a dualistic real and inflationary version of the same currency. Euro B would most likely need to be printed, because euro A does not seem to be working for the countries in debt.
Therefore, it may be possible to reset the euro and save the integrity of the euro zone without the need for the apocalyptic scenarios of its demise.