Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
-
Upload
david-clifford -
Category
Documents
-
view
225 -
download
0
Transcript of Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
1/70
i
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
2/70
ii
Contents
1. The threat to the global economy ..................................................................................... 7
Very different economies in the eurozone 7
This time might be different: a bigger shock than Lehman 13
The need for a Plan B 17
Yolk and White countries 18
Possible endgames for the eurozone 18
2. Achieving an orderly exit through the NEWNEY approach............................................. 25
Assessing different approaches to the exit of one or more states from the Euro 25
The impracticalities of a surprise redenomination 28
The NEWNEY approach in concept 31
Key steps in the NEWNEY process 36
3. Specific details on the NEWNEY approach .................................................................... 39
Setting the exchange ratio 40
Allowing FX movements and getting the exchange to happen in practice 45
Different monetary policies 49
Implications for private savings, domestic mortgages and international contracts 51
Implications for government debt 52
The stability of the banking system 54
The NEWNEY with more than 2 regions 55
Applying NEWNEY with a phased exit or with a small initial exit 55
4. Winnings and losers, and the politics. ............................................................................... 58
Evaluating winners and losers 58
The politics 61
Conclusions ........................................................................................................................... 65
Biography, contact details and acknowledgements .............................................................. 67
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
3/70
1
This paper in no way forecasts that any country will, or should leave the eurozone. It was written to
contribute one idea to a debate on possible options should a country decide to leave.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
4/70
2
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
5/70
3
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
6/70
4
Many have used the omelette analogy. For instance, Wolfsons prize is impossible to win by TimHarford, Undercover Economist October 21, 2011 Financial Times
If you approach this as a fried egg analogy, you end up thinking of the core countries as the Yolk andthe periphery countries as the White. However, as Tim Hartford (ibid) has pointed out, the Euro is moreof an omelet than a fried egg. Its the sunny yolk countries that have too much cholesterol (debt) butmaybe for some are a bit more yummy. The White countries are snowy, and some believe that we needto move to more of a lower cholesterol egg white omelet. For a detailed nutritionist discussion, seeHugo Dixons Reuters BreakingViews:http://www.reuters.com/video/2012/04/16/reuters-tv-breakingviews-can-the-euro-omelette-be-
u?videoId=233383502&videoChannel=117766
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
7/70
5
A number of others have described approaches with some similarities to NEWNEY. These include: I'mclaiming the 250,000 Wolfson prize for how to break-up the Euroby Jeremy Warner, Daily Telegraph 6January 2012. Why we must break up a failing Euro by Martin Jacomb, Financial Times May 23 2012.Olaf L. Mueller: "Eine Zentrifuge fuer den Euro". Neue Zuercher Zeitung NZZ No. 37 (February 14th,
2012), p. 19.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
8/70
6
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
9/70
7
Very different economies in the eurozone
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
10/70
8
CHART 1
Sources: Oanda; OECD
While the Euro notes and coins were not introduced until January 2002, two years later, the exchangerates between countries were locked on the 31 December 1998.
Wage data from OECD dataset.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
11/70
9
CHART 2
Sources: ECB Statistics Pocket Book
Debt data from The McKinsey Global Institute Debt and Deleveragingreports
Source: European Central Bank, Statistic Pocket Book, January 2012.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
12/70
10
See The euro: love it of leave it?By Barry Eichengreen, VOX 4 May 2010.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
13/70
11
See The Euro's Trade Effects, Richard E. Baldwin (2006) Tracking Consumers Through Europes Debt Crisis by Ivan Bascle, Camille Egloff, and Catherine
Roche, BCG May 17, 2012
Authors estimate.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
14/70
12
Interview with Robert Peston on The Great Euro Crash. BBC
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
15/70
13
CHART 3
Note: The Intrade volumes are relatively thin in this market.SOURCE: www.intrade.com
This time might be different: a bigger shock than Lehman
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
16/70
14
For instance see A Primer on the Euro Breakup: Default, Exit and Devaluation as the Optimal Solutionby Jonathan Tepper, Wolfson Economics Prize entry, April 2012. Available from policyexchange.org.uk
The calculations are very approximate and draw data from Paul Bairochs Europe's Gross NationalProduct: 18001975; the IMF; and Angus Maddisons Contours of the World Economy, 12030 AD.Essays in Macro-Economic History;and the IMFs Report for Selected Countries and Subjects.
We have been unable to find country specific numbers so are using global numbers as an estimate.
Numbers are from Angus Maddsions Growth and Interaction in the World Economy.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
17/70
15
CHART 4
Sources: Data from McKinsey Global Institute; national sources; Lehman Brothers 10Q filings May 2008; author analysis
1 The comparison is made to illustrate the scale of the shock but is not an exact like for like comparison. Not all of Lehmans assets were exposed tobankruptcy because of netting, and not all of the countries cross border debt will be exposed to redenomination as there might be matching assets. Theanalysis assumes approximately 30% of total debt as of Q2 2011 is held cross-border for Greece, Ireland, Italy, Portugal and Spain and that 90 days ofannual export and import contracts are at risk before contracts are renegotiated. The 30% cross border assumption is based on EBAs estimate thataround 30% of Greek sovereign debt and interbank lending is held by overseas banks, and around 40% of sovereign debt for Ireland and Portugal.Detailed cross-border debt data is ge nerally not available. These are the authors assumptions for this comparison. You can m ake your own but themessage remains similar with most assumptions.
2 As of May 2008, Lehman Brothers had $639.4 billion of assets, $613.2 billion of liabilities and $26.3 billion of equity.
8x
Data from McKinsey Global Institute, Mapping the Global Capital Markets 2011.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
18/70
16
European banking authority, 2011 EU-wide stress test, aggregate report
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
19/70
17
The need for a Plan B
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
20/70
18
Yolk and White countries
Possible endgames for the eurozone
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
21/70
19
: Euro Benefits Germany More Than Others in Zoneby Floyd Norris, New York Times, April 22, 2011;Germany and the Benefits of the Euro by Antonio Fatas; Germany cashes in on Euro benefits, for now
by Annika Breidthardt, Reuters.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
22/70
20
For a discussion, see Euro bonds wont cure what ails Europe, by Kotz, Krahnen and Leuz. Note this analysis was done for the EU and not the eurozone. Fiscal federalism in crisis: lessons for
Europe from the USby Zsolt Darvas, Bruegel Policy Contribution, July 2010
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
23/70
21
CHART 5
Note: CEE10: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, andSlovenia; MED5: Cyprus, Greece, Malta, Spain, and Portugal; UK&IE: Ireland and the United Kingdom;NORD3: Denmark, Finland, and Sweden; ABLN4: Austria, Belgium, Luxembourg, and the Netherlands; Italy(IT), France (FR) and Germany (DE) are shown separately; Gradients of lines are -0.002 and -0.002.
SOURCE: Fiscal federalism in crisis: lessons for Europe from the US by by Zsolt Darvas
Euro Isnt Loved, but Few Want to Drop It, Poll Says by Paul Geitner, New York Times, reporting the
Pew Reseach Centres Global Attitude Project.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
24/70
22
See appendix Leaving the Euro: A practical guide by Roger Bootle and Mark Pragnell, WolfsonEconomics Prize entry, April 2012. Available from policyexchange.org.uk
See Jens Nordvig and Neil Records Wolfson Economics Prize entries, April 2012. Available frompolicyexchange.org.uk
A permanent precedentby Martin Wolf, Financial Times, May 17, 2012
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
25/70
23
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
26/70
24
GDP per capita for Southern European countries is forecast by the EIU to not reach its pre crisis leveluntil at least 2018.
For a discussion see Unemployment Scarringby Wiji Arulampalam, Paul Gregg and Mary Gregory, The
Economic Journal
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
27/70
25
Assessing different approaches to the exit of one or more states from theEuro
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
28/70
26
CHART 6
Sources: BIS
Note: excludes the impact of corporate and bank debt1 Based on BIS data as of Q2 2011. We have not factored in complications of domestic cross-funding and inter-linked obligations for this
illustrative comparison
European Banking Authority, 2011 EU-wide stress test, aggregate report
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
29/70
27
Billionaire who broke the Bank of England, By David Litterick, Daily Telegraph, 13 Sep 2002 This point has been made by Nobel economics laureate Christopher Pissarides in Euro Exit Would Cost
Poor Greeks, reported by Jennifer Ryan in Bloomberg Businessweek
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
30/70
28
The impracticalities of a surprise redenomination
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
31/70
29
The approach to stamping notes, has been suggested by Eric Dor in Leaving the Euro Zone: a usersguide published in October 2011. The approach is similar to that used in the dissolution of othercurrency regimes such as Czechoslovakia see Teppers A primer on the Euro Breakup, Wolfson
Economics Prize entry, April 2012. Available from policyexchange.org.uk.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
32/70
30
See Greece should leave the Euro. How do you do that? by Jurre Hermans. Wolfson Economics Prize
entry, April 2012. Available from policyexchange.org.uk
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
33/70
31
The NEWNEY approach in concept
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
34/70
32
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
35/70
33
For details on automatic wage indexation see Figure 7 Leaving the Euro: A practical guide by RogerBootle and Mark Pragnell, Wolfson Economics Prize entry, April 2012. Available from
policyexchange.org.uk
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
36/70
34
CHART 7
6050403020100
Source: This Time is Different: A Panaromic View of Eight Centuries of Financial Crises, by Reinhart and Rogoff
Thanks to Hugo Dixon for pointing out the need to clarify this point explicitly.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
37/70
35
How the exchange ratio and market exchange rate can beused to determine the value of a Euro in a contract
Exchange ratio set attransition
1 Euro = 0.7 NEW (neweuro-white)
+ 0.3 NEY(new euro-yolk).
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
38/70
36
Key steps in the NEWNEY process
1.
2.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
39/70
37
3.
4.
5.
6.
7.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
40/70
38
8.
9.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
41/70
39
3. Specific details on the NEWNEYapproach
CHART 9
Illustrative data for Yolk zone exiting the eurozone
EUR BILLIONS
Eur Billions % eurozone
GDP 1,800 20%
Money supply 1,850 20%
Real economy debt 6,600 22%
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
42/70
40
Setting the exchange ratio
CHART 10
Belgian Franc 40.3399
Luxembourg Franc 40.3399
Deutsche Mark 1.95583
French Franc 6.55957
Dutch Guilder 2.20371
Austrian Shilling 13.7603
Irish Punt 0.78756
Portuguese Escudo 200.482
Spanish Peseta 166.386
Italian Lira 1936.27 Finnish Markka 5.94573
Source: European Central Bank
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
43/70
41
"Did Prices Really Soar after the Euro Cash Changeover? Evidence from ATM Withdrawals". PaoloAngelini; Francesco Lippi;. Fnf Jahre nach der Euro-Bargeldeinfhrung War der Euro wirklich einTeuro? [Five years after the introduction of Euro cash Did the Euro really make things moreexpensive?] Irmtraud Beuerlein; Did the introduction of the Euro impact on inflation uncertainty? - An
empirical assessment, Matthias Hartmann and Helmut Herwartz; source Wikipedia
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
44/70
42
CHART 11
EUR BILLIONSPre Separation Post Separation
Euro Zone White Zone Yolk Zone Comment
Currency incirculation
847 886 141 Need to adjust forreserve currencystatus remaining inthe White Zone andfrictional effect
Overnight deposits 3,942 3,154 788 Pro rated by GDPand GDP multiplier
Deposits with anagreed maturity ofup to 2 years anddepositsredeemable atnotice of up to threemonths
3,801 3,041 760 Pro rated by GDPand GDP multiplier
Money market funds 1,185 948 237 Pro rated by GDPand GDP multiplier
Real Economy Debt 30,000 23,400 6,600 Higher debt levels inYolk Zone
Less double
counting as held byfinancial institutions
- 20,000 - 16,400 - 3,600 Higher bank holdings
in White Zone
Total 19,775 15,028 4,927
Exchange ratio 0.75 0.25
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
45/70
43
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
46/70
44
ECB Statistics Pocket Book, January 2012
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
47/70
45
CHART 12
Sources: Eurostat; national sources;
Allowing FX movements and getting the exchange to happen in practice
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
48/70
46
CHART 13
EUR BILLIONS
Pre Separation Post Separation
Euro Zone White Zone Yolk Zone
Money supply and net debt 15,028 4,927
Money Created NEWs 11,318 3,710
NEYs 3,710 1,217
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
49/70
47
Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2010, Bankfor International Settlement.
See for instance, The controversial benefits of opting outFinancial Times December 1, 2005
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
50/70
48
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
51/70
49
CHART 14
Sources: Bloomberg; Eurostat
Different monetary policies
A rise in interest rates can result in a currency increasing in value on a one off basis as capital isattracted in. But these higher interest rate will have been announced before separation. The forwardcurve for the currency would include an expected depreciation in the currency reflecting the interest rate
differential.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
52/70
50
CHART 15
Sources: Datastream, World Bank DEC Prospects Group;
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
53/70
51
Implications for private savings, domestic mortgages and internationalcontracts
CHART 16
Sources: McKinsey Global Institute
67
87
124
105
98
48
45
62
82
94
60
81
91
0 10 20 30 40 50 60 70 80 90 100 110 120 130
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
54/70
52
Implications for government debt
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
55/70
53
CHART 17
Sources: McKinsey Global Institute
Reinhart and Rogoff's This Time is Different
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
56/70
54
CHART 18
1 Sample size includes all countries, out of a total of sixty six, that were independent states in the given year
Sources: Lindert and Morton (1989), Macdonald (2003), Purcell and Kaufman (1993), Reinhart, Rogoff, and Savastano(2003), Suter (1992), and Standard and Poors (various years)
The stability of the banking system
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
57/70
55
The NEWNEY with more than 2 regions
Applying NEWNEY with a phased exit or with a small initial exit
Nervous Europeans Snap Up London Property by Andrew Testa, The International Herald Tribune;
Foreign interest boosts prime locations, by Tanya Powley
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
58/70
56
A variety of the parallel currency has idea has been discussed by Gavyn Davies (FT May 24); TomasMayer (Deutche Bank); and Huw Pill (Goldman Sachs). However, these cases all have Greece
remaining in the Euro. With the NEWNEY-lite this would not be the case eventually.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
59/70
57
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
60/70
58
Evaluating winners and losers
CHART 19
Illustrative data for Yolk zone exiting the eurozone
DOLLAR BILLIONS
GDP 2,000
Overseas country liabilities, of which:*
ECB (LTRO, ELA, etc)
Target 2
Government debt help overseas
Loans from the IMF
1,800
400
500
800
100
* Some will be via the central bank.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
61/70
59
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
62/70
60
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
63/70
61
The politics
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
64/70
62
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
65/70
63
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
66/70
64
Time to plan an velvet divorceby Gideon Rachman, Financial Times.
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
67/70
65
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
68/70
66
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
69/70
67
Catherine Dobbs
Acknowledgements
-
7/27/2019 Catherine Dobbs - NEWNEY Approach to Unscrambling the Euro
70/70