Friday, June 15, 2012

Preventing a Eurozone bank and bond run

by Catherine Dobbs and Michael Spence


June 15, 2012

Whether the Greek elections this weekend trigger the Eurozone’s first exit or not, the possibility of exit is now firmly on the table. But where are the plans for this highly complex operation that could, if mishandled, cause untold economic damage in Europe and beyond? This column, by a Wolfson Prize finalist and a Nobel Laureate, sketches the core elements of one such plan.

While a number of commentators have agreed with Barry Eichengreen that the “decision to join the Eurozone is effectively irreversible” (Eichengreen 2010), there is a risk that the ongoing game of brinkmanship on the future of the Eurozone could up being overtaken by the market.

The outflow of capital from some of the troubled Eurozone countries has started, and will require tough decisions by policymakers on how much more capital to commit to firewalls or whether to accept the collective risk of Eurobonds. Without this, the capital exodus runs the risk of forcing one or more countries out of the euro, or might require the introduction of capital controls. However, Eurozone policymakers should also consider addressing the root cause of capital flight by considering agreeing to the principle that all euros should be treated equally, in the event of a country leaving. One possible way of achieving this equal treatment would be through the “NEWNEY” approach, which is at the heart of one of the shortlisted Wolfson Economic Prize Entries.


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