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WOLFSON ECONOMICS PRIZE 2012 Minimising the Financial Cost, And May 2012 WOLFSON ECONOMICS PRIZE 2012 Minimising the financial cost, and maximising the economic opportunities, of Euro Exit If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership? Neil Record 1 Table of Contents Introduction....................................................................................................................4 Background....................................................................................................................4 Planning for a departure.................................................................................................6 Secrecy ?................................................................................................................................ 6 Unplanned Exit.................................................................................................................................6 Planning without secrecy..................................................................................................................7 Planning in secret .............................................................................................................................8 Exit planning - relationship between Member States and the EU institutions....................... 9 Exit types ............................................................................................................................... 9 Key considerations in planning an Exit .......................................................................10 Task Force Charter............................................................................................................... 10 Planning is essential – the Task Force must be formed (and its existence denied).............. 11 The Task Force’s key considerations...........................................................................12 Exit – the run-up .................................................................................................................. 12 First priority – preventing a European, and therefore global, banking collapse .................. 12 Winners and losers............................................................................................................... 13 Euro banknotes – identifiable by country-issuer ............................................................................14 Minimising windfall gains and losses.................................................................................. 16 Redenomination uncertainty ................................................................................................ 18 Exit without Euro abandonment .......................................................................................... 19 A single country’s exit – the advent of intra-Euro currency risk......................................... 21 Hedging Intra-Euro currency risk...................................................................................................21 Why should the Task Force recommend the abandonment of the Euro ? ........................... 22 New ECU basket for termination or run-off valuation ...................................................................24 Mechanics of the new ECU............................................................................................................25 The ECB – a major systemic risk ........................................................................................ 27 Why does the ECB/ESCB have such a large balance sheet ?.........................................................29 Target2................................................................................................................................. 30 ECB on Exit......................................................................................................................... 33 European Financial Stability Facility (EFSF)...................................................................... 34 European Investment Bank (EIB)........................................................................................ 35 National Central Banks........................................................................................................ 35 Conduct of monetary policy ...........................................................................................................35 2 Lender of last resort........................................................................................................................36 Exit/transition timetable...............................................................................................36 Task Force activation...........................................................................................................37 Immediate aftermath – the first week .................................................................................. 39 Notes and coins ..............................................................................................................................41 Alternative methods to handle notes and coins ..............................................................................41 Rapid introduction of new notes.....................................................................................................42 Bank and savings accounts.............................................................................................................42 Mortgages.......................................................................................................................................43 Credit card debt, corporate and personal loans...............................................................................43 Pensions and insurance contracts....................................................................................................44 The individual’s perspective................................................................................................ 44 The business perspective...................................................................................................... 45 Multinational companies ................................................................................................................45 Exporting & importing businesses .................................................................................................46 Local businesses .............................................................................................................................46 Constitutional and legal questions ....................................................................................... 46 A German-only back-up plan............................................................................................... 47 Short-term disaster planning and avoidance ........................................................................ 48 Future political, economic and financial health...........................................................50 What does success look like for the announcement phase ?...........................................................50 Stability, growth and future prospects............................................................................................51 Argentina........................................................................................................................................51 Argentinean and Greek parallels ....................................................................................................53 Fiscal discipline ................................................................................................................... 54 Southern Countries, inflation and the future........................................................................ 55 Northern Countries post-Exit............................................................................................... 56 Trade and the EU ................................................................................................................. 56 Post-Exit exchange rates...................................................................................................... 56 New Europe ......................................................................................................................... 57 Summary and Conclusion............................................................................................57 3 Introduction This essay will consider the wide-ranging implications of the putative exit from the Euro of one or more current member states. It proposes a plan to minimise the inevitable disruption and maximise the chances of future growth and prosperity. It will not consider the likelihood of this event (since the essay title has made this the pre- existing condition). It will look in detail at the timelines that an exit might exhibit; critically, and in detail, at the implications on the financial infrastructure of such an event; at the legal questions and the ambiguities that will inevitably arise, and at the economic and financial implications in the immediate aftermath. It will briefly consider what a post-exit world might look like for a country that has departed. However, it will not present a detailed longer-horizon analysis of the post-exit economies (since it is certain to be so wide of the mark !), except where some economic analysis along well-established lines appears relevant to the central question.
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