Winding Down the Eurozone

I write this realizing that the dominant reaction might be, “That won’t work.”  Well, I toss out ideas on things like this because they *might* work, amid a situation where things are ugly, and real solutions aren’t appearing.  If you explain to me why it won’t work, that will help me do better in the future.  I don’t respond to all comments due to time constraints, but I do read all comments and I consider them.

We have a lot of problems in the world today, but the one that is the most volatile at present is the Eurozone. The Eurozone has issues, because tries to have one currency across an area where levels of productivity, retirement policy, regulatory policy, etc., vary considerably.

The goals of having an “ever-closer union” are perhaps desirable, if naive. Two can only walk together if they agree on underlying issues — with 17 nations, it is far tougher.

The first step toward a solution, given that all nations have fiat currencies is to acknowledge that you made a mistake in creating the Eurozone.  If you are going to have a fiat currency, you should have some form of taxation authority behind it, and that is not true in the Eurozone.

The second step is to re-introduce individual currencies for each country in the Eurozone.  A Euro would be defined as a weighted average  of the individual currencies in the Euro; the initial weights would stem from the percentage of GDP for the Eurozone as a whole.  Local currencies would be used for local transactions, but the trade in currencies and Euro arbitrage would result in changes in the trading values of the local currencies.  Quarterly, the value of a Euro relative to the local currencies would be redefined by the percentage of GDP the country has compared to the whole of the Eurozone.

The third step is dealing with bankrupt nations.  Solvent nations should not bail out bankrupt nations, but instead, bail out local financial institutions with assets from bankrupt nations the right way — wipe out common and preferred shareholders, and junior debtholders, and make senior debtholders take a haircut.  Protect depositors, but others in the capital structure lose.

Fourth, when things have normalized, take Euros, and force an exchange into the underlying currencies.  The Eurozone is gone, and all of the problems that it created.  Send the Eurozone to the ash-heap of other currency unions; they don’t work.

There will be some complexity here, but the need to undo a major policy error — creating a common currency when there is not a common government, is a significant matter, and the effort to unwind the mess should be pursued.

And now, you can tell me why this won’t work.

Disclaimer: This page contains affiliate links. If you choose to make a purchase after clicking a link, we may receive a commission at no additional cost to you. Thank you for your support!

About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website ( Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

Be the first to comment

Leave a Reply

Your email address will not be published.


This site uses Akismet to reduce spam. Learn how your comment data is processed.