Never has there been a good time to suggest the ending of a relationship…
Through thick and thin, a marriage is supposed to last forever, but when it no longer works, it sometimes is best to just step away. And whom better to give marriage advice than two famed economists?
According to Roubini Global Economics, the marriage of the euro zone is beyond “on the rocks” and the chairman Nouriel Roubini feels the EU should accept its fate.
Frequently a guest contributor to the Financial Times, Roubini -- along with managing director Arnab Das-- believe that through various efforts from the European Central Banks, all of the deeply-rooted problems continue to be unresolved in Europe.
We’ve seen Long Term Refinancing Operations (LTRO), the attempt for the ECB to offer banks cheap loans to avert a credit crunch, fall on its face. There have even been reports of the LTRO funds being spent in Spain on bull-fighting events! That doesn’t sound like a success.
We’ve also seen, firsthand, the failures of recovery for Greece, as well as Portugal and Ireland. And both Das and Roubini feel the problems are insurmountable.
They feel that the countries need further and much more extensive reconstructing while the euro zone continues to lack the essential components needed for a successful monetary union.
This is not the first time (nor the last) to hear “Dr. Doom” Roubini point out the failures and issues he has with the euro zone, but now he feels that “splitting up may be hard to do but it’s better than sticking to a bad marriage.”
The suggested plan of action for the duo would be:
-Propose a “divorce settlement” which would ideally have Portugal, Italy, Ireland, Greece and Spain leave the union while a core group of countries remains in the euro.
-Have the nations existing the EU rebalance their economies away from growth led by debt toward economies based on export and income-led growth.
-The remaining core nations should rebalance towards domestic demand.
-Although disruptions would most likely occur, a currency realignment would be necessary.
-Create a transitory monetary framework which would reverse the exchange rate mechanism that led to the euro. This would lead to new foreign exchange trading passageways widening at the same time inflation and exchanges rate risk returning to normal.
From CNBC,
They argue that inadequate foreign exchange reserves, currency losses and disorderly defaults would be mitigated by the ECB buying the new currencies of the smaller exiting countries at the floor of the trading band.
While the dismantling of the euro zone from its current form to a smaller band of countries has been mooted in the past, it is unclear how leaving the euro would work.
Roubini and Das suggest that all existing contracts be denominated into the new currencies while contracts made under foreign law would remain denominated in euros.
They concede that legal opinion would need to be sought to clarify the finer details.
This suggested plan may not seem as far-fetched as other ideas Roubini has offered, but simply put, an amicable exit strategy would be crucial to saving the euro zone. Though skeptics continue to question Roubini’s plan. Those opposed believe that proposing an exit from the euro zone for weaker economies would lead to capital flight at such a rate that banks could face a serious collapse.
While contrasting their arguments, Roubini and Das agree that in some scenarios bank nationalization would be necessary with restrictions on deposit withdrawals and temporary capital controls.
Divorce laws help prevent causing the bad marriage to end in misery and rather help achieve an amicable split. Both men feel that the euro zone needs to coordinate this strategy for an orderly exit “sooner rather than later because delaying often makes break up more costly.”
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