Let’s be ready for the unthinkable

Turbulence is now again stalking the eurozone. The French presidential elections have ushered in a new Socialist President. The Franco-German double act that has held the eurozone together until now may be severely strained. The government of The Netherlands, one of the strongest economies in Europe, has collapsed. Spain’s troubles look progressively more bleak. And, to cap it all, Greece faces new elections in a month’s time whose outcome is totally unpredictable and could presage their exit from the euro.

The eurozone’s problems, far from being resolved, appear to be getting worse.

Most euro currency countries lack the ability to grow while tied to the euro because they are uncompetitive, heavily indebted and have shaky banking systems. Unable to devalue their currencies, countries are trying to regain competitiveness by pushing down wages and prices. But as voters rebel against the pain and politics turns against austerity so the prospect of the survival of the single currency diminishes.

Common sense suggests that Malta’s political leaders – of both parties, for who is to know which of them will have to deal with the crisis when it breaks – and Ministry of Finance policymakers should be drawing up contingency plans on how to protect Malta’s interests if a break-up of the eurozone occurs.

As a British think-tank, Policy Exchange, has shown, managing the exit of any euro member, albeit complex, would be possible. Malta should be preparing its own contingency plans against that eventuality. Just recently, Policy Exchange announced a short-list of contestants for a prize for the best plan to manage a break-up of the eurozone.

Our policymakers should be examining the options proposed and adapting the elements best suited to Malta’s own circumstances to a fully-fledged contingency plan. I set out below a summary of some of the possible options as outlined in The Economist.

Drawing on the lessons from the end of the Austro-Hungarian empire, one entrant sketches out a possible scenario for the departure of the likes of Greece. His formula can be summed up in the phrase: depart, default and devalue.

A surprise announcement is made over the weekend and all deposits are redesignated in new drachmas while the banks are kept closed. Capital controls are imposed to prevent the flight of money abroad. For cash, the country leaving the zone first uses existing euro banknotes defaced with ink or a stamp. These are gradually withdrawn as drachma notes are printed. Border checks restrict the export of unstamped euro notes. Financial institutions are given time to update their software.

Another entrant considers it would be better to start with the departure of Germany and other strong economies, such as The Netherlands. But however it happens, fragmentation will create both winners and losers, with many bankruptcies and legal nightmares. Those involved in cross-border financial activity will find that their assets and liabilities change value and the sums involved will be so large and the litigation so ruinous that the best option would be to abolish the euro completely as soon as one country leaves the zone so as to invalidate all euro contracts.

Another entrant proposes unscrambling the euro “omelette” by splitting the euro into two or more zones, consisting of the weaker “yolk” and the stronger “white”. If this course were to be adopted, it underlines the message that the sooner Malta starts strengthening its ties with Berlin to ensure it is considered with the stronger “whites” and not with the southern “yolks,” the better. Although Malta is geographically a southern country, our economic performance in this crisis has put us with the northern angels. We need to be hammering this message home or we shall be left politically and economically stranded.

Under the omelette solution, all the euros in all the eurozone countries would be converted into a fixed combination of the “white” and the “yolk” while, over time, the weaker yolk would be devalued against the stronger white. Savers would, thus, be protected, initially at least, and capital flight to other eurozone countries would be discouraged.

The fate of the euro will be decided by politics as much as economics. Any one of the eurozone’s 17 members may rebel at the loss of sovereignty and the unrelenting pressure of austerity measures on its citizens. There are already clear signs that this is happening throughout Europe. The worst outcome would be a chaotic, unplanned break-up.

That there should be contingency planning put in hand by Malta must now be beyond doubt. It would be irresponsible if it were to be otherwise.

Our political leaders have a duty to think the unthinkable no matter how unpalatable the outcome.