Euroaren aldareko sakrifizioak, EBZ-ren jokaera

Thomas Fazi eta Giacomo Bracci-ren Sacrificing at the Altar of the Euro


(i) Euroguneaz1

(ii) Proiektu politiko bat

(iii) EBZ-ren jokaera austeritate neurriak onartu eta gero, “to preserve the euro3

(iv) Euroa: atzerritar moneta4

(v) Eurogunearen erreforma?5

(vi) Eurexit-en kostuak eta onurak6

(vii) Euroaren aldarea7

(viii) Warren Mosler8

The Devil is in the Details

(1 There are a variety of solutions for managing and minimizing the impact of a transition from the euro to a new national currency. The transition is likely to present serious economic and technical challenges and involve significant costs, especially in the short term, but the notion that leaving the euro would inevitably entail catastrophic consequences is simple scaremongering.

(2) The overall consequences depend on the economic framework that underpins the exit. If the exiting government refuses to free itself of the various self-imposed external constraints characteristic of neoliberal regimes and continues on the path of austerity, privatization, and wage restraint, then the exit is likely to be even more costly than continued euro membership. But combined with a decision to reject the current flawed neoliberal approach in favor of a fiscally active policy stance that seeks to maximize citizens’ well-being, the benefits of exit would very likely outweigh the costs.

(3) If the government chooses to use its regained currency and fiscal sovereignty to bring idle resources (including the unemployed) back into productive use — while at the same time re-establishing a degree of control over capital, trade, and labor flows as well as over the national financial sector and other key sectors of the economy — full employment and economic growth could be achieved relatively swiftly, without necessarily running into disastrous balance-of-payments or inflationary problems. As always, the devil is in the details.


Breaking up the eurozone would be no simple task. But maintaining the single currency dooms progressive politics across the continent.

For the defenders of eurozone orthodoxy, today’s crisis in the Argentinian peso offers a cautionary tale for countries tempted to abandon the single currency. Faced with the threat of the peso collapsing relative to the dollar, Argentinian president Mauricio Macri has had to appeal to the International Monetary Fund (IMF) for an emergency loan.

For one columnist in the Italian daily Corriere della Sera, the lesson was clear: whereas a country like Argentina is exposed to debt crisis, eurozone members are sheltered from it. Outside the single currency, a country like Italy would have a hard time refinancing its huge debt. The lively academic and political debate on the euro’s prospects, however, suggests that there is much more to the issue than meets the eye.

It’s worth examining the viability of the euro, from the qualms raised at its origin to its real effect on Europe’s economies. Here, we look at the prospects of reforming the eurozone in a progressive direction and the viability of leaving, and the objections often raised to euro exit.”


A Political Project

The general consensus on the European Monetary Union (EMU) among economists holds that there are gaps in the institutional structure of the euro area. EMU effectively (if not in law) eliminated the lender of last resort functions (through which national central banks could save their own countries’ banks and institutions in moments of crisis) that had previously been carried out by national central banks, without creating a replacement at the European level. The absence of such a backstop was no mistake, but the result of compromise and cynical political calculations.

The central European bloc of countries led by Germany entered the euro on the condition that there would be no risk-sharing mechanisms forcing them to aid their partners, while other countries such as Italy, France, and the Mediterranean bloc hoped that the benefits deriving from the low interest rates and low inflation guaranteed by the euro would offset the costs imposed by giving up their national currencies and accepting limits on their fiscal policy.

However, it is important to recognize that the European currency is a political project as much as it is an economic one. European elites welcomed the external constraint of the European Monetary Union (EMU) as a way of depoliticizing economic policy, removing macroeconomic policies from democratic and parliamentary control through a self-imposed reduction of national sovereignty.

Their aim was not simply to insulate economic policies from popular-democratic challenges, but also to reduce the political costs of the neoliberal transition by putting the responsibility for unpopular measures onto external institutions and factors. Guido Carli, Italy’s highly influential treasury minister from 1989 to 1992, noted that “the European Union represented an alternative path for the solution of problems which we were not managing to handle through the normal channels of government and parliament.”

It is important to recognize that the European currency is a political project as much as it is an economic one.

Several economists of various orientations warned that by imposing the northern export- and profit-led economic model (represented by countries such as Germany and the Netherlands) upon the very different political economies of southern Europe, the EMU would have high economic costs for these latter countries, historically characterized by higher inflation rates and weaker currencies. In 1993, Paul Krugman foresaw that once the single currency was established, Europe would experience a dramatic concentration of production and employment in countries with more competitive and better-developed economies of scale, such as Germany, at the expense of their European partners. It would be this former group that would benefit from the reduction in tariffs and barriers associated with the introduction of the single currency.

Such “convergence” would not be painless, Krugman warned: whole areas of the continent would be sentenced to productive desertification and worker outflow, a process Krugman termed “mezzogiornification” (from the underdeveloped south of Italy, known as the Mezzogiorno).

In 1999, Christopher Sims wrote that the creation of a central bank with no corresponding fiscal authority risked locking the eurozone in a deflationary trap, which Maastricht rules would only reinforce. Three years before, Rüdiger Dornbusch pointed out that in abandoning exchange rate adjustments, the euro “transfers to the labor market the task of adjusting for competitiveness and relative prices,” meaning that “losses in output and employment (and pressure on the European central bank to inflate) will predominate.”

A similar point was also raised by Martin Feldstein in 1997 and Milton Friedman in 1998, with a dangerous addendum: imposing a common monetary policy while also depriving countries of flexible exchange rates might force painful wage and price adjustments that could “exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.”

In the first ten years following its creation, the euro appeared to defy such pessimistic predictions, as interest rates on government debt gradually converged and inflation remained low and stable throughout the currency area. Under this surface-level calm, however, the euro “deepened the recession of 2002 in low-inflation Germany and fueled credit-financed booms of consumer spending and real-estate bubbles in Greece, Ireland, and Spain.”

This, in turn, led to the accumulation of massive trade imbalances between periphery and core countries. Moreover, from 1999 up to the financial crisis of 2007–9, the eurozone grew less than the rest of the European Union. The financial crisis and the explosion of the Greek sovereign debt crisis brought such imbalances to the fore, as peripheral countries experienced a sudden outflow of capital.”


Consequently, spreads on government bond yields (the difference between Germany’s bond yields and those of other countries) started to rise and the “PIIGS” countries (Portugal, Italy, Ireland, Greece, and Spain) were forced to pursue harsh austerity measures to meet growing interest payments. For almost three years — from late 2009 to mid-2012 — the European Central Bank (ECB) refused to intervene to support euro area government bond markets, leaving member states at the mercy of financial speculation and forcing a number of them to go cap-in-hand to the EU-ECB-IMF “troika” for financial assistance, conditional upon even harsher austerity measures. In Italy, the sovereign debt crisis led to Silvio Berlusconi’s ouster in fall 2011 and the ushering in of Mario Monti’s government of unelected technocrats.

Only in the summer of 2012 did Mario Draghi put an end to the debt crisis by saying that he was “ready to do anything it takes to preserve the euro.” Draghi’s message to financial markets was clear: if they continued to demand excessively high interest rates, the ECB would step in and buy the bonds itself. This delay is usually attributed to the complex politics of compromise that characterizes the eurozone decision-making process, and in particular Germany’s long-standing refusal to engage in any form of debt mutualization.

However, it is now becoming increasingly clear that the European sovereign debt crisis of 2010–11 was largely engineered by the ECB (and Germany) to force countries to implement austerity. As Adam Tooze noted, former ECB president Jean-Claude Trichet made no secret of the fact that the central bank’s refusal to support public bond markets in the first phase of the financial crisis was aimed at forcing eurozone governments to consolidate their budgets.

In other words, euro membership, far from sheltering countries from debt crises as its apologists claim, is the only reason the eurozone experienced a sovereign debt crisis in the first place.”


A Foreign Currency

That is because eurozone countries effectively use a foreign currency. Much like a state government in, say, the United States or Australia, eurozone countries borrow in a currency which they do not control. They cannot set interest rates or roll over the debt with newly issued money; thus, unlike countries that issue debt in their own currency, they are subject to risk of default.

As a recent ECB report tells us, “Although the euro is a fiat currency, the fiscal authorities of the member states of the euro have given up the ability to issue non-defaultable debt.” This gives an enormous amount of power to the unelected and unaccountable ECB. Its currency-issuing powers allow it to impose its own policies on recalcitrant governments (as it did in Greece in 2015, when it cut off its emergency liquidity to Greek banks in order to bring the Syriza government to heel and force it to accept the third bailout memorandum) or even to force governments to resign, as it did in Italy in 2011.

In this sense, the notion that the ECB has now evolved into a “normal” central bank is unfounded. ECB support for government bonds is dependent on member countries meeting strict conditions, designed to stop them making politically forbidden deviations from established fiscal rules (unless the countries in question happen to be governed by “friendly” governments, as with Spain and France, in which case persistent deviations from the rules are arbitrarily allowed).

Eurozone countries’ ability to service their debt thus depends on the goodwill of a central bank not subject to any form of democratic accountability or control. Even though the debt appears to be under control at present, the ECB can push any country back into the jaws of the financial markets at any time. This situation is unacceptable from a popular-democratic standpoint; it is also unparalleled anywhere else in the world.

This, coupled with the enormous social and economic costs that the current euro regime has meant for peripheral countries, has led many economists and policymakers to call for a reform of the euro area fiscal framework and the ECB’s mandate.

The European Union is structured to produce the very results that we are seeing today — the erosion of popular sovereignty, the massive transfer of wealth from the middle and lower classes to the upper classes, the weakening of labor, and more generally the rollback of the democratic and socioeconomic gains that had previously been achieved by the subordinate classes.

The mainstream left, in particular, continues to see it as its mission to “save Europe from itself,” by defending the European economic and integration process against the threat of a new wave of nationalism. It is driven by the belief that the European Union, as much as the eurozone, is compatible with a return of social-democratic policies, a Keynesian-style relaunching of the economy, and the creation of a fully fledged supranational democracy.

This position, however, presents numerous problems. Indeed, this outlook is ultimately rooted in a failure to understand the true nature of the European Union and monetary union.

First of all, it effectively reduces the Left to the role of defender of the statu quo, thus allowing the political right to pose as the voice of citizens’ legitimate anti-systemic — and specifically anti-EU — grievances. More crucially, however, it ignores the fact that the European Union’s economic and political constitution is structured to produce the very results that we are seeing today — the erosion of popular sovereignty, the massive transfer of wealth from the middle and lower classes to the upper classes, the weakening of labor, and more generally the rollback of the democratic and socioeconomic gains that had previously been achieved by the subordinate classes.

It is designed precisely to impede the kind of radical reforms to which progressive integrationists or federalists aspire.”

5 Ingelesez:

Reforming the Eurozone?

Certainly, many technical measures could be taken at the European level to stimulate the economy and make debt permanently sustainable, even within the current treaties. Countless such proposals have been put forward over the years. But the current balance of power among the member countries and the neoliberal path dependency of the European Union and eurozone makes such change politically unviable.

Still less realizable is a radical reform of the treaties in a more solidaristic and Keynesian direction. This would require a “eurozone government” to run budget deficits with the support of a reformed ECB, full debt mutualization, permanent fiscal transfers between countries, and so on.

Let’s take a minute to think about what such sweeping institutional reform would entail.

First of all, it would require left-wing governments coming to power in every single country of the union more or less at the same time (we have already seen what happens when one country tries to go it alone). After all, the only way to modify the treaties is through unanimity in the European Council. One doesn’t have to be particularly pessimistic to see why that is never going to happen.

Moreover, even in the unlikely event of a simultaneous, international alignment of left-wing governments, there is little reason to believe that Germany and the other countries of the “ordoliberal bloc” would ever be part of such an alliance, considering the deeply engrained anti-Keynesianism of Germany’s monetary and political establishment. Indeed, any hopes that the new German government might be more inclined to a sensible reform of the EMU were recently dashed by the country’s new finance minister, the Social Democrat Olaf Scholz, who made clear that Germany would not entertain any expansion of the European Union’s fiscal capacity (thus rejecting Emmanuel Macron’s proposals) and would delay other “reforms” that Germany had previously suggested it would support.

In fact, not only did Scholz vow to follow the balanced budget policy of his predecessor, the infamous Wolfgang Schäuble; he also reiterated that insofar as European reform is concerned, Germany supports the “minimalist” approach set in stone by Schäuble in a “non-paper” published shortly before his resignation. The main pillar of Schäuble’s proposal — a long-time obsession of his — consists in transforming the European Stability Mechanism (ESM) into a European Monetary Fund (a kind of European IMF) tasked with providing financial assistance to countries in need — conditional on the imposition of neoliberal structural reforms and possibly even debt restructuring — and monitoring (and, ideally, enforcing) compliance with the Fiscal Compact. This echoes Schäuble’s previous calls for the creation of a European budget commissioner with the power to reject national budgets — a supranational fiscal enforcer.

The aim is all too clear: to further erode what little sovereignty and autonomy member states have left, particularly in the area of fiscal policy, and to make it easier to impose structural reforms on reluctant countries.

To this end, the German authorities even want to make the receipt of EU cohesion funds conditional on the implementation of such reforms. For high-debt countries such as Italy the new arrangement would amount to an even tighter deflationary straightjacket than the current one. As noted by Simon Wren-Lewis, the political conflict of interest of having an institution lending within the eurozone would almost certainly end up imposing a severe austerity bias on the recovering country.”


The Costs and Benefits of Euro Exit

In this context, given the impossibility of deepening the monetary union in a way which is consistent with the maintenance in all member states of acceptable levels of employment, a strong welfare state, growth-friendly policies, and strategic public investments, we can no longer simply refuse to consider the potential benefits of euro exit.

Most important is that countries that were to leave the euro could make free use of fiscal policy to both address cyclical downturns and mount the structural investment plans that are needed to support employment and productivity. Since the beginning of the crisis, a country like Italy has lost 20 percent of its industrial production. Ten years on from 2008, the official unemployment rate stands at 11.4 percent. And this is not even considering underemployed and discouraged workers (people who have given up looking for a job and therefore don’t even figure in official statistics). If we take these categories into consideration, we arrive at a staggering effective unemployment rate of 30 percent, which is the highest in all of Europe.

The dire situation of the European labor market, characterized by high levels of long-term unemployment (mostly overlooked by official statistics), was also certified by the ECB and the EU Commission in 2017. Given these numbers, the potential costs of exiting the euro should be compared with the costs of remaining in the currency union in the absence of meaningful reform.

But are the costs of exiting the euro too high to make this option attractive at all? The mainstream viewpoint commonly predicts that a unilateral exit will bring devastation, catastrophe, hyperinflation, financial market lockout, etc. But is that really the case?

One possible cost is that the exiting government might not find enough investors standing ready to buy its public debt, and thereby risk default or monetization (direct central bank purchases of government debt) as a last resort for funding public spending. However, a government that issues its own currency and does not promise any kind of convertibility (in gold or other currencies through a fixed exchange rate mechanism) can never be forced to default, because it can always repay its obligations without breaking foreign parities.

Even the ECB acknowledged in a recent report that “[w]ith a national fiat currency, the monetary authority and the fiscal authority can coordinate to ensure that public debt denominated in that currency will not default, i.e., maturing government bonds will be convertible into currency at par.” Under a gold standard, the government literally needs to print banknotes to purchase gold (or gold certificates) in order to spend in excess of taxation.

With a fixed exchange rate, deposits denominated in local currency compete with deposits and assets denominated in the foreign currency which the government pegs its currency to; therefore, the central bank needs to give up its control of interest rates in order to maintain parity with the foreign currency by purchasing or selling foreign currency in sufficient quantities. However, the credibility of this promise crucially depends on the country’s foreign currency reserves: if the country runs out of reserves, the only option is default and devaluation, as we saw in Italy and the UK in 1992, and Argentina in 2001.

With a flexible exchange rate, however, the government no longer has to constrain its expenditure to meet the central bank’s requirements for sustaining a fixed parity against a foreign currency: it can spend simply by crediting the accounts of the recipients of public spending and debiting the government’s account at the central bank. Thus governments that issue their own currencies and float their exchange rate no longer have to “fund” their spending: technically, they can simply create the necessary money “out of thin air.” They never need to “finance” their spending through taxes or selling debt to the private sector, since the level of liquidity in the system is not limited by gold stocks, or anything else (which of course doesn’t mean that taxes don’t serve other important purposes).

A crucial advantage of leaving the euro would therefore be to regain the capacity to spend irrespective of revenues. In this context, the issuance of government securities is merely a monetary policy decision needed to support a positive interest rate in the interbank market (which is crucial for the central bank’s transmission mechanism), by providing investors with an interest-bearing asset that drains the excess reserves in the banking system that result from deficit spending. From a fiscal standpoint, however, a monetarily sovereign government can run fiscal deficits without issuing debt at all. This means that the government does not depend on private bond markets to support its deficit spending.

This does not imply that a currency-issuing government should spend or incur deficits without limits, or that fiscal deficits are desirable per se. Fiscal deficits in themselves are neither good nor bad. Any assessment of a nation’s fiscal position must be taken in the light of the usefulness of the government’s spending program in achieving its national socioeconomic goals.

This is what the economist Abba Lerner called the “functional finance” approach. Rather than adopting some desired fiscal outcome (such as achieving fiscal surpluses at all costs), governments ought to spend and tax with a view to achieving “functionally” defined outcomes, such as full employment. Fiscal policy positions thus can only be reasonably assessed in the context of these macroeconomic policy goals. Attempting to assess the fiscal outcome strictly in terms of some prior fiscal rule (such as a deficit of 3 percent of GDP) independent of the actual economic context is likely to lead to flawed policy choices.

Thus, from a progressive standpoint — that is, one that assumes the government’s objective to be the pursuit of full employment and increased levels of well-being for its citizens — there might indeed be circumstances in which it is sound for a government to run a fiscal surplus, though more often than not ongoing fiscal deficits will be required to compensate for the private sector’s saving desires.

It is commonly believed that financing government spending through a fiscal deficit rather than through taxes is inherently inflationary — even more so if the deficit is financed directly by the central bank rather than by the private sector. In reality, fiscal deficits do not carry any intrinsic inflationary risk. Instead, it is government spending itself that carries such a risk, regardless of how such spending is financed — by raising taxes, issuing debt to the private sector, or issuing debt to the central bank.

Indeed, all spending (private or public) is inflationary if it drives nominal aggregate spending faster than the real capacity of the economy to absorb it. In other words, the government taking money sitting idle under someone’s mattress and spending it in the economy carries exactly the same inflationary risk as the central bank creating that money out of thin air and giving it to the government to spend. What matters, from an inflationary perspective, is the government’s capacity to spend without overheating the economy.

Though it is impossible to predict the behavior of the price index, economic theory and central bank research has acknowledged that there is no direct relationship between the monetary base and inflation, and therefore between debt monetization and inflation. Banks are not intermediaries of funds that they already have; in fact, they create new deposits whenever they issue a loan, with the central bank accommodating any reserve requirement the banks need to ensure banknotes are always available to the final customer and payments to other banks are possible.

Therefore, there is no reason to believe that an increase in bank reserves would lead to increased bank lending. In the words of Claudio Borio and Piti Disyatat of the Bank of International Settlements, “[i]f bank reserves do not contribute to additional lending and are close substitutes for short-term government debt, it is hard to see what the origin of the additional inflationary effects could be. The impact on aggregate demand, and hence inflation, would be very similar regardless of how the central bank chooses to fund balance sheet policy.”

These findings suggest that the impact of government spending on inflation in a country that left the eurozone would depend largely on factors of supply and demand. If the deficit level run by the government outstrips the productive capacity of the economy or is directed towards unproductive sectors, it could generate inflation, as producers would continuously adjust prices upwards to defend profit margins in the face of a growing demand for goods and services.

However, countries like Italy, Spain, and Portugal still face a high unemployment rate and excess capacity of their industries, thereby making it difficult for demand pressures to affect prices significantly: as a result, core inflation is stuck at around 1 percent for most eurozone members. Ultimately, there is a very low risk of demand-pull inflation as long as the total growth spending in the economy does not exceed the productive capacity of the economy.

In the context of the legitimate goals of a currency-issuing government, fiscal deficits should be aimed at allowing the economy to sustain full employment, which means that it would be irrational for such a government to push spending beyond that productive limit deliberately.

Cost-push factors, however, might come into the picture. An increase in employment could trigger an increase in the average wages demanded by workers, thereby leading employers to prop up prices in order to defend the profit share of national income, like in the 1970s. Furthermore, self-fulfilling expectations of a sharp depreciation of national currencies vis-à-vis the euro and/or the dollar might cause an increase in import prices for fundamental inputs such as oil, gas, etc.

However, it must be noted that in most advanced countries we are seeing a flattening of the inverse relationship between inflation and cyclical unemployment (generally known as Phillips curve): different levels of unemployment are consistent with similar rates of inflation, thereby weakening the impact of labor market conditions on the growth of the price level. This implies that wage pressures on prices are less likely unless unemployment is reduced to very low levels, revealing the presence of high slack in the euro area, which has also been recognized by ECB officials as the main driver of the central bank’s inability to meet its statutory obligation to raise inflation to a level “below, but close to, 2 percent.”

Depreciation of the new national currency could, however, be a problem, as this would raise the cost of productive inputs and imported consumption and investment goods. Nonetheless, various studies have called into question the widely held belief that exiting the euro would inevitably cause a massive depreciation of the new currency.

In Italy’s case, for example, most studies foresee a 10 to 30 percent depreciation of the new lira relative to the euro or what would become the new German mark. There is no reason to believe that this would cause severe inflationary pressures in the exiting country. In fact, empirical evidence shows that “the correlation between changes in consumer prices and changes in the nominal exchange rate has been quite low and declining over the past two decades for a broad group of countries.”

The single currency is a good case in point. Over the 2008–2016 period, the euro has lost around 30 percent of its value against the dollar. This has not been accompanied by runaway inflation in Europe; on the contrary, the continent continues to be mired in “lowflation” if not outright stagnation. Ultimately, however, a bit of inflation would be welcome, as it would reduce the real burden of debt for private and public debtors. Additionally, if wages are indexed to inflation, families would not suffer from a problematic increase in the ratio between interest payments and current income, thereby smoothing the transition to the new currency.

A serious inquiry into the drivers of inflation also provides a solid background for understanding why the recent devaluation of the Argentinian peso should not be regarded as a warning sign barring an exit from the euro. A recent study by Pablo Bortz and Nicolás Zeolla shows that the recent crisis of the peso is largely the byproduct of a policy aiming to attract international investments while downsizing the public deficit, lifting all exchange rate controls, adopting an inflation-targeting regime, and increasing dollar-denominated borrowing.

Since 2016, the Argentinian government, provinces, and private companies have issued $88 billion (roughly 13 percent of GDP) and the Argentinian central bank has offered large financial gains to short-term foreign investors by allowing them to engage in carry trade operations. Foreign investors could enter the country with dollars, buy peso-denominated debt instruments issued by the Argentinian central bank, which had to offer high yields to be attractive (up to 38 percent), and finally convert these bonds plus financial gains to dollars. These operations have totalled around $14 billion (2 percent of GDP) since 2016.

It should not come as a surprise that this process caused a large depreciation of the peso, whereas previously implemented controls forced exporters to sell their foreign currencies in the foreign exchange market; as a consequence, the over-reliance on foreign borrowing made the sudden stop and reversal of capital flows more painful. Moreover, the large devaluation of the peso fueled a sharp increase in inflation (from 24 percent in 2015 to 41 percent in 2016) without managing to boost exports significantly.

Therefore, we can restate the real lesson to be drawn from Argentina: reducing government deficits while luring the “confidence fairy” of private capital inflows — much like the pre-crisis private debt boom in peripheral countries within the euro area — is a dangerous economic strategy. A “functional finance” approach aiming to maximize employment by mobilizing all available domestic resources would provide a stable and equitable growth strategy, thereby reinforcing the case for monetary sovereignty even more for euro area countries.”


We Won’t Die on the Altar of the Euro

As we have seen, one of the main advantages of exiting the euro for a country like Italy would be to regain control of its public debt by redenominating the existing euro-denominated debt into the new national currency. This would not be particularly problematic from a legal standpoint. According to the legal principle of lex monetae, the currency of a debt is determined by the law of the country in whose currency the obligation is expressed. Only about 2.5 percent of Italy’s public debt was issued under foreign law and would have to remain in euros. The rest of the debt was issued under domestic law and could thus be redenominated into the new currency.

Nonetheless, a secret and sudden redenomination of all euro-denominated bonds into the new national currency would likely trigger a massive sell-off of government debt, generating a large depreciation of the new currency and inflationary pressures within Italy. For this reason, several economists have suggested ways of mitigating the adverse impact of redenomination.

For instance, Giovanni Siciliano, head of research at the Italian securities market regulator CONSOB, writes in his recent book Vivere e morire di euro (Living and Dying by the Euro) that a clear and well designed negotiation with bond investors can ensure that no foreign bondholder loses in real terms, even faced with the depreciation of the new currency. Siciliano suggests the anticipated introduction of a changeover period in which both the euro and the new national currency are allowed to circulate; as a consequence, a market exchange rate can emerge and businesses can start quoting prices and paying wages in the new currency.

According to Siciliano, the redenomination of existing euro-denominated government debt could be made less painful by negotiating with investors a gradual increase in bond yields to offset the losses expected due to the depreciation of the new currency. Siciliano argues that the redenomination would not be impaired by the Collective Action Clauses (CACs) included in post-2013 issues of Italian government bonds as a condition to be included in the European Stability Mechanism’s platform, as Italy’s exit from euro would automatically exclude the country from the ESM.

As a matter of fact, Siciliano proves that markets correctly anticipated the irrelevance of CACs for redenomination risks, as yields and credit ratings on all the durations of Italian government bonds issued after 2013 did not significantly differ from pre-2013 issues. The impact of redenomination on private debt is yet another issue. In the case of Italy, the country’s private sector has a net surplus vis-à-vis the rest of the world (due to the big sums of money that Italians invest abroad), so for the private sector as a whole redenomination would likely not be a massive problem (though of course it could and would be for individual firms).

The notion that leaving the euro would inevitably entail catastrophic consequences is simple scaremongering.


Another hotly debated issue is whether bank deposits should be redenominated. This would of course entail a loss for depositors, due to the depreciation of the currency. The economist and former financial professional Warren Mosler has proposed another route. His plan entails keeping all euro-denominated debts in euros, with the government announcing it would start to spend and tax exclusively in the new currency, which would be free-floating, with exchange between willing buyers and sellers at market prices. Mosler’s plan would also keep bank deposits and loans denominated in euros, with a powerful incentive to convert deposits into the new currency: the newly converted deposits would be fully guaranteed by the government, whereas euro-denominated deposits would not. According to Mosler, the no-redenomination strategy would counteract the tendency towards depreciation engendered by a massive conversion from national currency to euros that would be likely after the transition.

In fact, the government would be the sole issuer of the new national currency, but it would also be imposing taxes denominated in the new national currency: the need to pay taxes would support a notional demand for national currency which would keep the value of the new lira stable vis-à-vis the euro. In this scenario, the exiting country’s citizens would have to sell euros and buy lira from the new government without any legally binding conversion: banks would act as intermediaries and the government would swap euro-denominated deposits at its national banks with deposits denominated in the new currency.

The “excess demand” for the new national currency would prevent a massive depreciation vis-à-vis the euro as the national central bank would buy euros and sell lira at an administered price, maybe at a small premium (sellers would also include customers and banks willing to convert mortgages and loans from euros to lira). According to Mosler, banks should also be regulated in such a way as to avoid proprietary trading and be solely limited to lending; these measures would be impossible to undertake within the European Union’s current banking union framework.”

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