Mosler/Pilkington: A Credible Eurozone Exit Plan

By Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract and Philip Pilkington, a journalist and writer based in Dublin, Ireland

The Eurozone has certainly seen better days. The mess – to paraphrase a dodgy Irish politician – is only getting messier.

This is all avoidable, of course, and if the European authorities decided to take action and have the ECB backstop the sovereign debt of the periphery the whole crisis would come to an end. But the European authorities, for a variety of reasons, do not seem to want to do this. And even if they did there would be the issue of austerity: would they continue to force ridiculous austerity programs down the throats of the periphery governments? And if so, then for how long? Leaked documents from within the Troika show the austerity programs to be an abject failure and yet European officials continue to consider them the only game in town. So, we can only conclude at this stage that, given that European officials know that austerity programs do not work, they are pursuing them for political rather than economic reasons.

So, we contend that the periphery governments should have a credible exit strategy on hand and it is to this that we now turn.

Such a strategy would not be very hard to implement and would consist of two key principles:

1. Upon announcing that the country is leaving the Eurozone, the government of that country would announce that it would be making payments – to government employees etc. – exclusively in the new currency. Thus the government would stop using the euro as a means of payment.

2. The government would also announce that it would only accept payments of tax in this new currency. This would ensure that the currency was valuable and, at least for a while, in very short supply.

And that is pretty much it. The government spends to provision itself and thereby injects the new currency into the economy while their new taxation policy ensures that it is sought after by economic agents and, thus, valuable. Government spending is thus the spigot through which the government injects the new currency into the economy and taxation is the drain that ensures citizens seek out the new currency.

The idea here is to take a ‘hands off’ approach. 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.

That the new currency should have a floating exchange rate is absolutely key. Some commentators have suggested that upon exit the country in question pegs the new currency to the euro to ensure that it retains its value. In this scenario the new currency would then retain its value vis-à-vis the euro. Thus import prices would not go up unless the government made a conscious decision to devalue the currency.

This might sound good on paper, but we contend that it would be nothing less than an ‘out of the frying pan, into the fire’ scenario were it ever applied in reality. In order to peg the new currency to the euro, the central bank would have to hold adequate amounts of euros in reserve. By pegging their new currency to the euro they would essentially be making the promise that they would swap euros for the new currency on demand. And so they would have to somehow obtain and hold adequate reserves of euros to do so. In this case we assume that this would mean an accumulation of debt denominated in euros from the IMF or some similar arrangement.

Such an approach can cause serious problems. The defaults in Argentina and Russia – in 2001 and 1998 respectively – and the disastrous states of the economies leading up to them, were due to the fixed exchange rate system that these countries chose to pursue. What happens under such a system is that the governments soon find that fluctuations in credit conditions of their domestic economies results in fluctuating demand for their currencies and, since they do not hold sufficient reserves of the currency they have pegged to, their interest rates skyrocket and the government loses its ability to spend as it sees fit. The end result is that they attempt to borrow the foreign currency they need from the IMF. This generally only provides temporary relief and forces the country in question to undertake austerity measures that sends the unemployment rate soaring, increases the deficit through increased unemployment payments and weakens tax revenues as the economy slows. As debt deflation dynamics reinforce themselves, the country runs out of foreign currency reserves and they then default on the promise to convert, which is then typically followed by a depreciation of the currency of about 70%. And so we’re back to square one but with an economy in far worse shape and, potentially, blood in the streets.

As we can see, undertaking a foreign currency peg would put the peripheral countries in exactly the same position as they are currently in; they would remain dependent on holding reserves of a currency that they do not issue. Much better that the exiting country simply allows its currency to float vis-à-vis the euro and let the market set the exchange rate. That way the country will have full sovereign control over their currency and without the threat of default.

Any loans that the government had taken out in euros would either be ignored or, if absolutely necessary, renegotiated in the new currency. Such would be considered a default, but since the entire exit is basically a default, we see no reason why this should be considered problematic. At the same time existing contracts for goods and services taken out by the government in question would also be redenominated in the new currency.

We understand that such a move would lead to the bankruptcies of many within the country. Anyone with private external debt denominated in euros would have to try to service this debt or fall into bankruptcy. While this is unfortunate, it will not interfere with overall levels of employment, output and real domestic consumption. In these circumstances the debtor would still be allowed to keep his existing balance of euros and would not be prevented from trying to accumulate the currency, so he or she would be given every fair chance to service his or her debt.

Any banks that suffered seriously from losses on loans made in euros would probably have to be allowed to fail and their assets be sold on. But such a process is old hat in Europe at this stage. With the ability to issue their own currency the exiting government could facilitate recapitalisations of the banks themselves without need of foreign currencies or having to borrow from abroad.

It is also important that the exiting government discontinues their austerity programs immediately. Since they would no longer depend on the Troika for their funding they should use their newly gained fiscal policy space to accommodate counter-cyclical fiscal adjustments that seek to reduce unemployment and promote economic growth. Argentina after her default in 2001 would be a model in this regard and we would encourage policymakers to consider the direct employment jobs guarantee program (Jefes), an employed labour buffer-stock approach that was initiated there and proved to be far superior to current policies that utilise an unemployed buffer-stock as a price anchor.

Should the newly issued currency weaken substantially, this may be temporarily painful for importers and those reliant on imported goods. However, a weakened currency will also ensure that domestic industry gets a major boost. As exports rise strongly in the new weakened currency, trade partners will begin to seek the currency out in order to buy products with it. This will lead the value of the currency to rise and the added cost pressures that the weakening of the currency placed on imports will fall.

We would also encourage any country that might be facing exit to print up a handy supply of new currency in secret and keep it on hand just in case. With the situation in Europe what it presently is an exit might be a hair-trigger decision and in such circumstances it is better to be prepared than to be forced to take ad hoc actions that could well lead to disaster.

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    1. Dave

      Seriously, you MMT guys appear as religious as those advocating the Real Business Cycle.

      The difference being that RBC has obviously failed based on the data, while MMT is never going to be applied (and so untested over time) because those in charge of the treasuries/central banks aren’t as given to believing that by virtue of having a currency and a central bank means that you can solve every problem regarding government borrowing by linking the two.

      If you think about it, MMT is to good to be true. It ignores politicians who will act in the interest of their own election.

      Governments sell bonds to raise finance when necessary not because they have to, but simply because over time it is the route that has led to relative stability. Despite politicians not really understanding cause and effect, their advisors can say things like “Zimbabwe” and win the argument.

      Selling bonds is an external check on the actions of simplistic politicians. Is it the perfect answer? No. It’s just better than the other options given the imperfection of elected leaders.

      1. F. Beard

        Selling bonds is an external check on the actions of simplistic politicians. Is it the perfect answer? No. Dave

        Sovereign government borrowing is fascism. It makes government the usury collecting agent for the banks and the rich. Hamilton himself admitted as much when he said the national debt would bind the interests of the rich to the new government.

        It’s just better than the other options given the imperfection of elected leaders. Dave

        The proper solution is the allowance of genuine private money supplies (but only for private debts) so as to abolish the stealth inflation tax. Then government overspending relative to taxation would only hurt the government and its payees, not the private sector. Jesus hinted at this solution in Matthew 22:16-22 (“Render to Caesar ..”).

          1. F. Beard

            I don’t think so. The Jews were also required to pay a Temple Tax and for that Romans coins were not accepted. Hence the money changers.

      2. Calgacus

        Dave, the whole bloody world used MMT for decades, under the name of functional finance & Keynesianism, during the US New Deal & the postwar Keynesian full employment era. And every wartime economy in the history of humanity – at least of the war-winners. There has never been such a thoroughly and widely tested and insanely abandoned theory. One of the true problems with MMT is that it is not emphasized enough how old the damn thing is. How intuitive it is. How everyone used to know it and still knows it deep down. But wass ist bekannt ist nicht erkannt. How trivial it is & how hard it is to do trivial, easy, simple scientific work.

        One should appreciate the perspective that the MMTers are not so much bringers of a new truth, but people who have not forgotten the old ones. Monks laboring in monasteries preserving ancient knowledge while moronic & bloodthirsty barbarians from Harvard & Chicago & Frankfurt slaughter millions of human sacrifices to their dark gods.

        Sure, the modern MMTers have gone beyond their predecessors. But a large part of it is that they have actually had the guts to do their work scientifically, rigorously, carefully, in baby steps, without lying to themselves they understand things they don’t. And so they reaped the rewards of actually understanding & going beyond the earlier true progress in economics.

    2. MRW

      I’m with Joe Firestone. This is brilliant. And it reflects the way currency actually works, in the real world, not the wishful thinking of those who have their heads in depleted gold mines.

      Richard Parker said this on NPR a few weeks ago:

      “Parker: Look, I think that we misunderstand when we talk about the Greek crisis or even about the Euro crisis. What you’re going through is a crisis that is the aftershock of the original 2008 meltdown on Wall Street. What happened over the last 30 years was not just a question of some kind of change in the way that the Greeks finance their government or the creation of the Euro Zone. It was that American capital, which is the largest base of capital in the world, was systematically deregulated. And power to make decisions that should’ve been in the hands of regulators were left to the banks themselves. And so what’s happened is that you’ve got American banks being recapitalized by the treasury and by the federal reserve not going back into the business of making loans, but instead taking that recapitalization, turning it over to their trading floors, and for the last two years essentially doing some high volatility trading in commodities and European government bonds. And you cannot allow teenage boys to play with fast cars in an unsupervised environment and not expect crackups.”

      I would love to see those “teenage boys” cry to mama.

  1. Nathanael

    I think it would make the most sense for a group of these governments to get together and implement the SAME replacement currency. Only this time, with all of the governments retaining the right to inflate the currency (perhaps with a rule that every time one government printed, it had to send some proportion to each of the other governments).

    Really, what is wanted is to kick Germany out and replace the ECB, and this would be the most effective way to do that.

    Anyway, it’s also crucial to make sure every one of these countries has a liberal bankruptcy law first — otherwise rather than causing a lot of bankruptcies, it causes *debt slavery*. Look up Spain’s painful laws on mortgage debt — those *need* to be changed.

  2. F. Beard

    I like.

    However, I would add that government should not sell its fiat for the Euro or any other currency or lend it or borrow it back. Government should simply create, spend (or give away) and tax as needed its own fiat.

    Let taxpayers buy the fiat they need on the open market which cannot, of course, include the government or its central bank.

    1. F. Beard

      And if the government needs to buy something from the rest of Europe then let them accept the new fiat or forego the sale.

  3. vlade

    No, it wouldn’t for a very simple reason – each o the countries has a very slightly different problem.
    Irish and Spanish have huge private (read banking) debt.
    Italy has chronical uncompetitvness + bad demography.
    Greece has totally useless institutions.
    Devaluation is a help for some of those, and probably Spain and Ireland would profit most from it. For Greece, it may make less difference than you think. Italy is somewhere in the middle I’d say.

    1. Philip Pilkington

      Greece? Two words: cheap holiday.

      The problems in the Eurozone have little to do with the ‘real economies’. Don’t be fooled by the agitprop coming out of the Troika. This is currency problem.

      1. vlade

        Er.. No amount of devaluation is going to fix the inability to collect taxes efficiently (for example). Indeed, to an extent you could argue that it’s going to make it worse as it gets back to the good ole “we’ll just devalue when needed”.

        I don’t give a toss what troika says – the reality is that Greece is hit by two problems. Both wrong currency, and wrong institutions. Fixing currency fixes one problem for Greece, but not all of it.

        Saying that all that’s bad in Greece stems from EUR is closing your eyes to other real problems (similarly, Italy will have its demographic problem regardless of what currency it uses).

        1. Philip Pilkington

          It would not be a sovereign debt crisis were it not for the Euro. The Greek economy, warts and all, ran on Drachma fine prior to the adoption of the Euro and the subsequent meltdown.

          The problem is what it is: the Euro. Everything else is 110% secondary.

          1. traderjoe

            Well, it’s a Euro borrowing problem. Sovereign countries should not borrow money from private corporations and the central banking cabal.

        2. craazyman

          I tend to largely agree, but never-the-less I think Phil and Warren’s idea is a good one — and I myself have suggested it in comments — to restore the drachma and keep the euro.

          In fact, I’d go so far as saying this is the second macroeconmic article I’ve read that makes sense. Marshall Auerback wrote one last year. That’s two so far. ha hahah. Two black swans.

          So this would give Greece a chance to engage in a “soul retrieval” — because it slowly lost its money/soul through inattention and stumbling into the devil’s whips and snares — but it wouldn’t take it all the way. It would have to look in the mirror and make some hard changes to its social institutions. Getting your soul back is not an easy process and it’s like wrestling with the devil for your soul.

          the French painters did a multi-decade riff of “Jacob Wrestling with the Angel”. Not exactly like wrestlin with the devil but sometimes angels are demons in disguise. Here’s P. Gaugin’s version:

          Sadly, it’s the Greek poor and dispossed who will have to do the wrestling, but at least the drachma will give them some fuel for the fight.

  4. F. Beard

    With the ability to issue their own currency the exiting government could facilitate recapitalisations of the banks themselves without need of foreign currencies or having to borrow from abroad.

    Who says banks are even necessary? And aren’t they the root of the problem? Indeed they are.

    1. F. Beard

      Instead, the defecting government should provide a risk-free fiat storage and transaction service that paid no interest and made no loans.

      As for the banks, they should be purely private institutions and let the depositors bear the risk for the interest they collect.

  5. reason

    What I don’t understand here is what happens to existing bonds. The problem is that a devalued new income currency for tghe government combined with debts denominated in the old currency worsens the debt crisis which is why the government is leaving the Euro in the first place. Shouldn’t all Greek (or whatever) government bonds be instantly converted to the new currency? Or will they be defaulted?

    1. Philip Pilkington

      “Any loans that the government had taken out in euros would either be ignored or, if absolutely necessary, renegotiated in the new currency. Such would be considered a default, but since the entire exit is basically a default, we see no reason why this should be considered problematic.”

      1. vlade

        I have to look it up, but I suspect that this may lead to the greek Target2 stuff frozen and taken away.

        I need to look it up to understand whether it’s technically Greek CB (and thus Greek govt) liability, as that would potentially allow to seize it. That, in turn, would effectivelly seize EUR deposits of Greeks in non-greek banks (well, it would transfer the liability for them to the Greek govt, which would be the equivalent of redenominating them in new drachma). But w/o reading some legalese it’s all speculation now.

        1. Philip Pilkington

          “TARGET itself is not, strictly speaking a funds transfer system, in that transfers cannot be fed into TARGET directly; it merely links existing national systems. TARGET provides interlinking and security components via which the national systems can communicate.”

          The TARGET system gets a lot of play for something that “is not, strictly speaking a funds transfer system.” That “transfers cannot be fed into TARGET directly” would presumably make it a rather boring piece of technobanking. But it’s accumulated a certain mystique on the internetz. All unfounded, I should think.

          (Anyone remember HW Sinn’s inane ramblings about TARGET2? No? Of course they don’t. They were nonsense. This is just a clearing system. It doesn’t transfer wealth.)

          1. vlade

            I’m looking it up as I go, but as I understand it now, greek deposits with German bank create Greek CB liability to German CB (currency being liability and all). Since if Greek CB dropped from EUR, it would not be able to satisfy the liability, it’s not entirely clear what would happen to the Greek deposits there.

            Thinking about it, it’s matches the no “wealth transfer” – ie. if greek party moves money to German bank, it doesn’t move wealth from Greece to Germany. It just creates a circle where the Greek’s bank asset with Greek CB is relaced with German bank’s asset with German CB and German Bank’s asset with Greek CB – net being the same liability to Greek CB.

            Now, the question is what would happen to the German CB liability with German bank, since we know what would happen to the EUR liability of Greek CB.
            Put like this, it looks better for the Greek depositors than I thought it might.

            That said, it would do absolutely nothing to prevent Germany to create a levy on Greek depositors to pay for the liability of their govt.

          2. Philip Pilkington

            I don’t see it. It’s a clearing system. Nothing more.

            But even if I did see it, this is a legal issue. This would amount to theft (see my comment below). Germany could also technically send in the army to seize all euros from citizens. That would be theft too. We’ve come a little further than that in Europe — even if not much.

          3. Vlade

            Tax ain’t theft remember :) even a selective one. Neither is nationalisation. Of course, Greece could declare war if it wished but…

      2. reason

        It seems to me denominating ín the new currency is fairer to bond holders and reduce the risk of a banking crisis in still Euro countries. Then
        1. The bonds are devalued according to the market value of the new currency.
        2. Default risk disappears.

        1. Philip Pilkington

          Yes, I think there’s a case to be made for this. These bondholders made an honest investment. These aren’t toxic sludge assets — they’re government securities.

          But then again, if we pay up the currency devalues more. So, maybe we’d freeze their payments and promise payment in future? Anyway, it’s up to the government.

          1. reason

            What would you think of a half way house – split the Euro in two – with a Mederranian Euro and a Northsea/Baltic Euro. Of course it doesn’t go the MMT way (far from it) but as an intermediate step it might make sense as it would allow some of the advantages of the Euro (travel/trade/investment) to be retained. The new Med ECB (in Nice?) would have to have a LLR functionality included though.

          2. Philip Pilkington

            Meh… It would take a lot of organisation. And what do the member countries really get out of it at the end of the day? Not much. Better to keep the EU intact and regain national currency sovereignty, I think.

            Besides, if this whole thing tanks I think it would be a fairly half-organised affair. Then again, the whole crisis has been a fairly half-organised affair, really. That’s a good deal of the problem.

  6. F. Beard

    Also, Steven Keen’s general bailout (with the new fiat) might be a good idea for the defecting country. Debtors could pay down their debts (with the banks being forced to accept the new fiat at par with the Euro?) and savers would have a big chunk of new cash to spend or lend honestly.

  7. vlade

    I don’t believe banks would be happy to have firm EUR liabilities (Greek deposits) and EUR assets (Greek loans ulikely to be serviceable).

    I suspect as a result it would still create a run on greek banks (or any banks with significant greek liabilities/assets), and resulting panic.

    I then suspect that the non-greek banks with Greek assets might (try to) freeze/claim Target2 liabilities of greek CB (in effect the Greek deposits with them) to offset losses (we’re now talking about no-precedent legal stuff anyway, so it would be worth a try).

    It’s of course workable solution – but then, majority of what was mooted around would work in one way or another. On the orderly/disorderly scale I’d say this is in the middle if the non-greek banks wouldn’t reciprocate, and very disorderly if they did.

    1. Philip Pilkington

      So the Greek banks would be so unhappy holding EUR assets that they would allow a run to take place? Hmmm… I wouldn’t.

      And if they went after Target 2 the Greek government should jail them. That’s just straight theft.

      1. vlade

        Err, and how, pray, would Greek govt “jail” German bank w/o any branches in Greece?

        Whatever protection EU treaties offer to T2 would be very hard for Greeks to call on, since by unilateraly leaving EMU they would in effect leave EU (that’s how the current treaty is worded, and the choice would be with the rest of the EU, not greeks on whethe they would still be in EU or not) and thus selectively choosing which EU treaty bits to apply would hardly fly.

        I still haven’t found the legal stuff governing T2. The main question is whether they are CB liabilties or custody accounts – but I suspect it’s the former based on some reading few weeks ago.

        It would be a great treat (in more than one way) for international lawyers, but I suspect that it would boil down to possession being 4/5ths of the law.

        1. Philip Pilkington


          Anyway, see above. TARGET2 is probably not as exciting as people think.

          It really boils down to this: if the Greek government guarantee that their citizens get to keep their euros, they keep their euros. If the Germans start fiddling with the interbank payments system the Greeks can just replace the ‘stolen’ electronic entries with… you guessed it… more electronic entries. They can then mint some nice Greek 2euro coins:

          The European banking system isn’t The Matrix. These isn’t some old bloke sitting in a room in Frankfurt with his hands on the buttons that make Greek banks disappear. Its all just electronic booking-keeping. Keystrokes.

          1. vlade

            I’m not sure. When you say “more electronic entries”, that implies the ability to “print” EUR. Which, if Greeks had, we wouldn’t have the problem in the first place.

            They can call their currency “EUR”, but it doesn’t mean other people will accept it to extinguish the “other” EUR liabilities at par.

            I wonder what minting coins en-masse would do, since technically at that stage it would be counterfeiting.

          2. Philip Pilkington

            You’re almost there. It’s not a banking issue. Banks are just a means to an end. It’s a legal issue — and issue of ownership.

            I’m Irish. I have a bank account with Xeuro in it. Those Xeuro are mine. That’s that. Nothing else matters. They’re mine. I earned them. No one has the right to say otherwise. If the Irish government rejigs balance sheets to ensure the Germans don’t steal them through the banking system (which they won’t/can’t, but just for the sake of argument), that’s not counterfeiting. That’s preventation of theft of private property. Pillage, we used to call it, when an occupying power seized the property of citizens of another country.

            If the Irish government continued to SPEND in newly issued euros after exiting, THEN we’d have a counterfeiting issue. Then it would be like North Korea counterfeiting dollars. But that’s not what we’re talking about.

            This is all far more simple than some people would think.

          3. Vlade

            disagree. money is all about trust and willingness of the other party to accept it to settle liabilities. your eur are irish cb liabilities accepted by ecb (and thus other emu cbs) if ecb decides not to accept them anymore, your irish eur are (outside ireland) not worth the electricity used to store them.
            same idea with any credit currency. any deposit you make to your bank ends up in someones nostro with a cb. if a cb decides to deny the nostro to someone, tough luck (in effect it would be withdrawing the banking license).

          4. Vlade

            in other words, greek govt can’t guarantee greeks keep their eur since it doesn’t control the nostro – and ecb could redenominate the liability in new drachma (that having at least as much legitimacy as greeks defaulting on their debt)

  8. botogol

    seems to me it’s still, logistically, very hard.

    the govt suddenly announces it will pays all its employees, and services all its contracts in the new currency — but without new-currency bank accounts set up and ready , how? an absolute bucketload of physical cash ?? enough cash for the governments’ entire monthly spending?

    1. Philip Pilkington

      You just put an entry on the balance sheets marked £ rather than €. Simple.

      Since ATM cash might not be available until they rejigged the ATMs, I’d suggest cash payments for all wage workers until then. Contractors could take checks, I’m sure.

  9. John Derpanopoulos

    One should take into account that Greek banks are in debit (to the ECB) to the tune of EUR 90B. Allowing them to continue to honor their deposits as Euro liabilties is inefficable as the ECB would call in the 90B liquidity extended to them (in case of euro-exit).

  10. DelusionalEconomics

    Just one suggestion for Warren and Philip. One of the issue I see it with this ‘plan’ is that the deflation of the new currency will initially make it difficult for some members of the private sector to have access to some of the basics to support their businesses. Fuel ( petroleum ) comes to mind for a country that cannot provide enough to meet internal demand.

    I would suggest as part of the plan the government attempts some sort of import stockpiling before switching to the new currency in order to provide a buffer to the private sector from the initial shock and any import disruptions that may ensue.

    I have previously thought that the GIIPS should attempt this sort of plan together in order to share resources under the a new currency, however this may introduce more issues given there would be more than one national government.

    1. Philip Pilkington

      We discussed this. But we decided against going into the details of the post-EU fiscal policy as it would be too much to go into. I favour substantially lowering VAT rates on petrol.

  11. LAS

    And those individuals with a loan payable in Euros do what in the meantime? Sell the family silver, jewelry, auto, spare kidney and children (if any of these) to accumulate Euros to pay off their loans? Else go bankrupt. What will they be allowed to retain in event of bankruptcy?

    One man’s brilliance translates into another man’s disaster any way you cut it.

    1. reason

      it is what to do with outstanding debts (of all kinds) that seems the problem to me. I don’t think it works unless you redenominate them.

    2. Philip Pilkington

      If it’s internal, we re-denominate. If it’s external, they go bankrupt. Unless they can continue to accumulate euros. They could go get a job in Germany and make repayments that way. Can’t save them all, unfortunately. It’s a bit like those who took out loans in dollars in Argentina prior to 2001. Can’t save them all.

      1. reason

        I agree, but shouldn’t the same apply to deposits with domestic banks, which are loans in reverse? Otherwise the banks have a problem matching their assets and liabilities. And you can’t bail out a EURO liability with a Drachma (or whatever) LLR facility can you?

  12. Pat

    The only real solution is for all countries to go back to native currencies all at once – EZ countries suddenly declare a bank holiday, close down all exchanges and banks, each EZ country issues native currency, everyone converts Euros to native currency at a realistic peg, all existing debts are payable in either Euros or native currencies. This is the only way to prevent bank runs and huge capital flows.
    (Of course Germany would be against this, since the new DM would go up by 30-50%. But if all countries go native at once, what choice does Germany have but to reconvert?)

    The Mosler/Pilkington plan is perhaps better than the alternatives, but would still cause widespread chaos.
    There is a huge supply of Euros hidden in closets and under the bed, and this supply would be even greater as everyone rushes to cash in drachma, pounds etc for “real money”, ie Euros. Whatever currency Germany uses is “real money”. The underground euros would go into German bank deposits, or go into black market economies in each of the countries. Merchants would generally only want Euros since they must pay Euros for raw materials. Non-government employees would want to be paid in Euros. And there is the enormous problem of what governments are going to do when they collect taxes in native currencies but must borrow and service debt in Euros. What about oil? Who is going to accept Lira instead of Euros for petroleum?

    The Mosler/Pilkington plan does have one big advantage – creditors and bondholders would get something, native currency Monopoly money, instead of nothing at all. So German and French banks would have native-denominated debts on their books and would not be insolvent. Individual countries could avoid default simply by printing more native money.

    The Euro is an unholy mess, and the only real solution is to completely undo it – everyone goes back to their own currencies.

    1. reason

      “(Of course Germany would be against this, since the new DM would go up by 30-50%. But if all countries go native at once, what choice does Germany have but to reconvert?)”

      Well of course they wouldn’t have to. But I sort of wonder why Holland and Luxembourg would want to go off Euros.

    2. Jim

      If I have my Euros in an Italian outpost of a German bank, why would I not cross the border and withdraw my Euros in a non-Italian branch of the same German bank?

  13. Dan Duncan

    Warren Mosler…“creator of the mortgage swap and the current Eurofutures swap contract”…I call bullshit.

    Mosler obviously takes pride in this achievement–as he should. It is significant.

    Yet I can’t find a single, independent confirmation. It seems that somebody, somewhere would have attributed these “creations” to Warren Mosler. Can you please point to any independent source for verification?

    You’ve run for Congress. You’ve been an academic at that junior college in Kansas City. Now, you’re leading an op-ed piece with this resume-stuffer, that I seriously doubt was even vetted by your unpublished journalist cohort.

    [And if Mosler won’t stoop to sourcing his achievements, isn’t it a fundamental duty of the co-writer journalist source the expert’s achievements? So, Phil…how about it? You have confirmed the lead-in statement to your piece that Warren Mosler “created” these instruments, right? Surely, as a “journalist” you didn’t just take his word for it. You couldn’t be this stupid. So, please give us an independent reference.]

    Now, I know people who are predisposed to your views will find my request irrelevant. But it is relevant: You led the piece with this statement. Besides, Mosler is a public figure with political aspirations, as well as being an academic at the Missouri Kansas City Junior College.

    1. MRW

      Hey Dan,

      Buy his book. Or got to and download it on the left for free. His resume is Part II. You can call up the companies and verify.

    2. Philip Pilkington


      Oh, and Warren also founded the Mosler super-car company — but we can only say so much for his credentials without coming across as bragging:

      And he runs a bank in Florida:

      I think Dan Duncan should post his CV. What do you guys think?

      1. Dan Duncan

        Pilkington, are you kidding me?

        You’re referring to personal bios, written by Mosler. Not one of those are independent. And the Wikipedia references…what a moron.

        That’s what I love about this:

        We have a quintessential Wall Street 1 Percenter, lying about his accomplishments.

        We have a blogger, who for some reason refers to himself as a journalist…even though he’s never written for an edited publication, who’s too stupid and lazy to vet his “expert” source…

        BOTH get called out, and Pilkington responds with personal bios ALL written by the “expert” source himself…and, oh yeah, Wikipedia articles that were also written by Mosler himself.

        [Pilky, you have no freaking clue, do you? You have no idea whether Mosler actually “invented” these instruments, do you? You simply took his word for it.]

        And Pilky concludes by asking me–the reader for a CV! This is such a f*cking joke. It’s embarrassing.

        Phil, all you have to do is give a legitimate independent reference. Think about it, Pilky: I’m calling you both out as liars. I might be wrong. All you have to do is give an independent reference, and it will shut me up. I’m serving you up a hanging curve ball. This is easy!


        1. Philip Pilkington

          Do you try to look like a fool or does it just come naturally? Half those links are from registered businesses.

          Here’s an independent source pulled totally at random from Google:

          “We have a blogger, who for some reason refers to himself as a journalist…even though he’s never written for an edited publication, who’s too stupid and lazy to vet his “expert” source…”

          Again try a Google search, you twat:

          You’re a failure even as a troll. No wonder you’re so angry. Again, Dan, post your CV. Come on. Man up. Even as a troll. A failure. No wonder you’re so obsessed with dredging up the credentials of others…

    3. Joe Firestone (LetsGetitDone)

      “Besides, Mosler is a public figure with political aspirations, as well as being an academic at the Missouri Kansas City Junior College.”

      Warren isn’t an academic at the above institution, if it exists at all (I won’t bother to look that up.) From his bio he is:

      “Co-Founder and Distinguished Research Associate of The Center for Full Employment And Price Stability at the University of Missouri in Kansas City. CFEPS has supported economic research projects and graduate students at UMKC, the London School of Economics, the New School in NYC, Harvard University, and the University of Newcastle, Australia.

      Associate Fellow, University of Newcastle, Australia”


  14. MacCruiskeen

    “The government would also announce that it would only accept payments of tax in this new currency. This would ensure that the currency was valuable and, at least for a while, in very short supply.”

    Wait, this is Greece we’re talking about here, right? Famous for the efficiency of its tax collection system? I’d say there’s a more than even chance of this plan causing government workers to walk off their jobs and tax collections to go to zero.

    1. Philip Pilkington

      This Troika propaganda is going to haunt us for some time, I think.

      “Greece’s state revenue in 2010 rose 5.4 percent on an annual basis to 51.1 billion euros ($68.4 billion)…”

      €51.1bn annually? So, that means that people will have to accumulate €51.1bn at least in the new currency. That’s quite a bit of demand for the new currency.

      1. MacCruiskeen

        Still, it would require the cooperation of people to go along with it. And there’s no particular reason to assume that they will, when they’ve clearly demonstrated a willingness to strike and demonstrate against changes they don’t like.

        1. Philip Pilkington

          Well, they don’t HAVE to accept their paychecks if they don’t want.

          Oh, and yes, Greek workers are on strike. How’s that working out? Much government response? No? Still doing the austerity measures? Oh, well…

  15. craazyman

    You guys should get on RT TV with that hot babe in the bikini and get some PR, like Reggie.

    OR Maybe Bloomberg TV where I think you gotta to be under 120 lbs and capable of appearing in a Sports Illustrated Swimsuit Issue to get in front of a camera (as the hostess).

    This may seem like it has little to do with public policy, but I frankly think it’s the only way to break through the fog of desultory and deliquescent dirigisme — otherwise this sort of brainstorming will never be anything other than Geek mental you-know-what (I won’t even say it, but it begins with an “M”).

    We need for the meme to pro-create and what better way than with a hot woman in a bikini with a global audience of guys like DSK.

  16. joebhed

    I thank the authors for daring to put some components of a ‘draft Euro exit-strategy’ down on paper.

    This obviously should have been forthcoming as part of the “Here’s How You Join – Here’s How You Exit” implementation of the EuroZone Agreements long ago.

    But, why does the ‘exiting party’ not declare its monetary sovereignty, and more clearly define its basis for national economic commerce in the future.

    Greece Only As Example
    The old Greece-Drachma ‘fish’ was transformed into the Greece-Euro ‘fowl’ – officially removing its monetary sovereignty rights. The proposed actions here, more tactics than strategy, fall short of restoring true monetary sovereignty.

    Rather it seems to leave Greek commerce in a fish-and-fowl kind of monetary free-for-all, where lenders and borrowers will be individually settling their accounts on the basis of currency scarcity – possibly in two currencies. There seems little management capacity being given to the Greek national economy and monetary authorities.

    Again, absent the “Please sign this Euro_Exit Agreement” coming from the EU, nations need to go further in restoring their monetary sovereignty to as close to what existed prior to EU entry as is possible.

    That might be a lot to bite off, given the present state of the EMU debacle. But more ‘strategic’ planning is needed for long-term stability and certainty in order to make the proposal more readily acceptable.

    The effort benefits from all internal transaction becoming Drachma-based and all external settlements being done on the basis of the exchange rate when due.
    This, of course, denies the ‘haircut’ negotiations. But, that is another matter.

    Thanks again, guys.

    1. F. Beard

      I like the plan because there SHOULD be separate government and private money supplies in an economy. Granted the Euro is not truly private but it opens the door for other private currencies.

      The government requires that taxes be paid in its fiat. What else should it need to give value to its fiat? A way to sneakily tax the population via inflation? I think not.

      1. joebhed

        First, I’m not sure which of those would be private.
        Second, if private banks can create credit, they will usurp, and eventually destroy, the state’s ability to ‘manage’ the national circulating media.
        Imagine arguing over how much of the new money needed should be provided by the state and how much by private debt.
        “Who is causing this inflation?”

        Actually, Phil’s comments here go a long way to fill in the lines of demarcation. Even as well, the default-declaration of the haircut.

        1. F. Beard

          Second, if private banks can create credit, they will usurp, and eventually destroy, the state’s ability to ‘manage’ the national circulating media. joebhed

          The banks’ ability to leverage would be very limited without government privileges such as a lender of last resort and government deposit insurance. The government itself should provide a risk-free fiat storage and transaction service that made no loans and paid no interest.

          “Who is causing this inflation?” joebhed

          That would be easy to determine since each currency would have its own in(de)flation rate.



    This idea is so far out it orbiting the earth.

    First: Once on their own, each country faces a large devaluation of their currency on the markets. Their national debt owed to sovereign states goes through the roof and they still have to pay it. How does that change anything (except for Germany and Italy, whose citizens own large portions of the national debt)? Only haircuts reduce the debt burden, which can be done but only if negotiated in solidarity.

    Second: With the devaluation export markets will jump – for those that have viable export markets. That’s how many countries? Maybe no more than four or five, obviously including Germany. Germany will really benefit, maybe Italy, but that’s about all. Southern Europe is highly dependent upon tourism as an export market.

    Third: The Euro stops immediately to be a Reserve Currency, so sovereign states will no longer hold them and cash them in immediately. (With some exceptions, like Germany.) Which produces a massive depreciation of their value, given the amounts involved. What happens, in return from selling their reserves denominated is Monopoly Money, is that they cannot use the funds to pay for imports, since they import so little from many EU countries. So they dump the currency on exchange markets further suppressing further its value. (Main EU export markets: China, 18,8%; United States, 11,3%; Russia, 10,5%, Switzerland, 5,6%; Norway, 5,3% etc.)

    Fourth: The new currency markets will increase export costs due to currency exchange costs.


    Let’s face it, the only Viable Alternative is one that adds the least burden on European countries. Which is to run with Euro and get the Germans to come around to agreeing to let the ECB bank the debt (by essentially printing money).

    And we all get back to normality, which will mean slower EU growth for next five to ten years – when this Mess become a nasty but distant nightmare.

    1. Philip Pilkington

      “Their national debt owed to sovereign states goes through the roof and they still have to pay it.”

      No they don’t. That’s what ‘default’ means.

      “The Euro stops immediately to be a Reserve Currency, so sovereign states will no longer hold them and cash them in immediately.”

      Huh? Reserve currency? For who? The Euro is only the reserve currency for those pegged to the Euro, like Romania. For everyone all the other countries it is just the currency they use.

      My guess is that if any countries exit the Euro would SOAR in value. If the whole periphery left it would effectively be a neo-Deutschmark. And if this were to be the case and I found myself in the currency markets I’d position myself accordingly.

      1. LAFAYETTE

        No they don’t. That’s what ‘default’ means.

        Default on the debt does not annul the debt. It just means payments are extended in the currency to which the nation reverts.

        Besides, default on national debt (regardless of the currency) and the interest-rates only increase. The only alternative to rolling over the debt is to balance the budget.

        Which none of these nations, including the US, are about to do in the short-term.

        The Euro is only the reserve currency for those pegged to the Euro,

        The Euro constitutes presently 26.7% of all foreign exchange reserves (aka sovereign fund) holdings.

        1. F. Beard

          The only alternative to rolling over the debt is to balance the budget. LAFAYETTE

          Not if a country is monetarily sovereign which it would be if it left the Euro.

    2. Foppe

      Your “solution” would simply continue the current structural imbalances; and it is, therefore, extremely antisocial, unless you are also proposing that the Dutch/Germans/etc. should pay for the Greek wages/unemployment benefits/etc..
      In other words, it is no solution, since the latter is politically impossible to pass.

      1. Philip Pilkington

        Structural imbalances were caused by a single exchange rate. With floating exchange rates the periphery could compete with the core.

        1. LAFAYETTE

          With floating exchange rates the EU would be back to the European Exchange Rate Mechanism, ERM “snake” introduced in 1979. With each country devaluing in order to remain in the snake as the occasion arose, which prevented tighter integration of European economies – the professed Holy Grail of the EU.

          No, been there, done that … the Euro was intended to avoid the fluctuations and that is what it has done.

          The mistake made was to not insist on very tight budget controls (from Brussels) that would force countries to observe the 3% of GDP debt limit.

          Greece, Spain, Portugal and Ireland (and somewhat Italy) have a tough row to hoe, but it is not Mission Impossible.

          1. Foppe

            urgh. You really have bought the propaganda hook, line and sinker, haven’t you.. Can you even explain what has caused the eurocrisis in the first place? Or are you still stuck believing it was the “Greeks/Italians/Belgians/Spanish/Portuguese who were irresponsible”?
            Get it through your head: single interest rate policy = bad; eternally fixed exchange rate (read: dutch/german mercantilism) without fiscal transfers = bad. Since when is adopting the protestant work ethic a prerequisite for being a proper European citizen?

      2. LAFAYETTE

        Your “solution” would simply continue the current structural imbalances

        Not in the least. The EU has adopted new rules that permit the Commission in Brussels an overview of national budgets, which is what should have been done from the very beginning of the euro.

        As this process continues in the future, the countries will bring their accounts into line such that none transgresses the already established maximum of 3% of GDP.

        Besides, some economists even predict that the Euro will be overtaking the dollar as a reserve currency by 2020. So, why in heaven’s name should the EU want to avoid the privileges of the euro becoming a reserve currency?

        It’s really stupid.

        1. Foppe

          Oversight is irrelevant. German/dutch mercantilism is issue #1, the centrally managed low interest rate policy is #2. Neither would be fixed by your “fix” which is further centralization.

  18. The Dork of Cork

    Excellent suggestion but the trusting souls who put their Euros into the Post office would get burned badly.

    PS I can’t see the Irish Wallflowers going for a free floating Punt given their lack of Liathordi – a 50% peg to Sterling would be more likely in my opinion.

    1. Philip Pilkington

      That’s what worries me. That the government — in their infinite WestBrit-itude — would peg to the sterling and we’d get a far worse financial crisis a few years down the line. That’s a real concern.

      (P.S. Post office savers would keep their euro-denominated savings…)

      1. tawal

        Why doesn’t the IMF take over the Euro, rather than creating SDR’s, and the member countries just revert to their own currencies. This way the IMF gets all the unpayable debt and is ring-fenced as the bad bank. In this way we can get rid of the IMF for good, and we won’t have it preaching austerity for the poor and privatization of the commons for the rich all over the planet.

  19. Hugh

    I think we are long past the point of soft landings. The European political class is owned by its kleptocrats. So a country like Greece would need first a revolution to throw out all its current major parties before it could initiate a revolt against the Paris-Berlin axis of the core. Only then could it return to the drachma and convert all current euro debts into drachma denominated ones. If Greece and a few other of the small countries or one of the large ones, like Italy or Spain, followed suit, the euro would be gone. None of this could be done on the sly or in secret, which is to say that any break up of the Eurozone is going to be disorderly. The current choices seem to be between very disorderly and chaotic.

  20. richard in norway

    I might be missing something here but I don’t see that this plan automatically leads to a devaluation, it all depends on the supply of the new money against the demand for the new money. Considering that govt in the initial phase at least will be able to control one of these, would it not be possible for them to effectively dictate how much the new currency would devalue or even go the other way and appreciate



      I might be missing something here but I don’t see that this plan automatically leads to a devaluation, it all depends on the supply of the new money against the demand for the new money.

      Yes, evidently. You are thinking perhaps in terms of national accounts of money supply – M1,M2, etc., etc.

      The “money” in question however is the debt-instrument denominated in Euros when transacted upon the market. When a EuroZone country defaults on that instrument and moves to whatever pre-euro currency that existed, the sovereign funds will decide whether they want to sell the instrument or not. After all, the question remains, Do we want to keep our savings in a bond the currency of which may lose value?

      (Nobody should think that the drachma – for instance – will stay at the price at which it entered the euro. The condition as regards its ability to sustain the debt then and now are entirely different. As the CRAs will sure note.)

      If the instrument is German, then no, the funds will want likely to keep it. If Greek, then yes they will want to sell it and buy dollars. When they sell it, the market determines the price (based upon CRA valuations, which is why they exist) AND it factors in the volume of debt being transacted AND currency in which it is transacted. If they sell a Greek debt-instrument denominated in euros, they will be getting drachmas in return – and they will sell the drachmas to buy (more than likely) dollars.

      The drachma exchange rate WILL go down therefore, especially if the sovereign fund wants to move into the only other reserve currency – the dollar. “Fleeing to safety” is what the maneuverer is called. And if the dollar were not the dollar, it would go through the same process and devalue.

      [And I did not mention the cost of energy supplies that are typically denominated in dollars – that is, what the devaluation would do to those import costs.]

      MY POINT

      Let us thank our merciful God that as Americans the dollar is the dollar. We should be grateful, because otherwise our collective asses would be in one helluva sling. (Meaning “not a pretty place to be”.)

  21. Fiver

    First, a practical question or two:

    1) Is there a model that demonstrates that this “creeping” currency exchange via government spending is more effective than a thoughtful planned system shutdown and reboot?

    2) Who wants to be the first recipients and spenders of new currency, in a near-total, old-currency economy as part of what would be widely deemed to be a “radical experiment”? Or the first to accept such as payment at the grocery store? How much currency needs to be in circulation until there’s at least a half-assed accurate, shared idea of how much it’s worth?

    3) Is it not likely at least a few predators attempt to game the system by hoarding currency in front of tax-collection/due dates, again, especially the first ones? That is, of course, money not deducted at source, right?

    Those aside, I just don’t see how this can be viewed as simply a problem with money. It is that, but it is also very much a question of history, geography, resources, demographics, politics, religions, and a host of other factors, all of which have conspired to place Greece, other Southern European States, much of Eastern Europe, etc., in frankly terrible positions of weakness in this utterly mindless version of a globalized economy. It’s going to take a lot more than simple default and devaluation for all these betrayed peoples to make up for a decade of gross economic maladaptation based on their financial, economic and political elites’ stupidity and lies.

    I rather think the best solution is for Germany and other core members is to cut their losses now; to abandon the idea of political/fiscal union as untenable (there is simply no comparison to the US); to themselves seek the orderly exit and default of weaker members; negotiations re conditions for future extension of credit for business/trade and other private purposes; and start work on a serious pan-European development plan the focus of which is intra-European self-sufficiency in the highest degree possible.

    And send a bunch of teams to Cuba, where the people have decades of experience in making the best from the worst of circumstances.

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