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I have often referred to the macro-economic illiteracy of the eurozone’s economic policy establishment. Equally, if not more irritating is the political and legal illiteracy of economists who deal with eurozone issues. This year’s Wolfson economics prize is a celebration of the latter type.
The question posed by the Wolfson prize committee is: “If Member States leave the economic and monetary union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?”
The question makes two implicit assumptions. The first is whether the posed condition is possible, for otherwise the question makes no sense. The second assumption is one of existence. If you ask: what is the best way, you assume that such a way must exist.
Macro-economists conveniently tend to confuse a monetary union, for which they have no model, with a loose fixed-exchange-rate system or a single-currency area, for which they do.
Leaving the EU is a unilateral act. The countries that exit lose access to funding from the common agricultural policy and EU structural funds. It may be possible to reach friendly transitional agreements, or for the departing Member States to join what is known as the European Economic Area, which gives non-EU Member States access to the single market. But all this takes time to negotiate. If the goal of the exercise is to introduce a national currency, it would have to be done within a few days to avoid capital flight. The only way to accomplish this would be a simple “I want out” treaty. In that case, however, there is not much to coordinate. The country would redenominate all domestic contracts and most likely have no choice but to default on all foreign contracts.
How about if everyone in the European Council agreed to break the law and simply allowed a eurozone exit without an EU exit. If everybody broke the law, there would be no one left to sue. We all know that European law is pliable. Remember the no-bailout clause?
If the departing country were to remain in the EU, it would remain subject to EU law. If it abandoned the euro in all domestic contracts, but maintained it in all foreign contracts, the consequence would be a flood of well-founded lawsuits. Every citizen of the departing country would have a legal case against its own government – and possibly against the other Member States as well. A eurozone exit would constitute discrimination on grounds of nationality – the biggest “no, no” under EU law. Remember, the euro is still their currency under the treaty. If the EU went down that road, it would cast doubt on the legal basis of every single contract. The premise of the Wolfson prize question is thus a situation of utter legal chaos.
I can envisage a situation in which the eurozone could break up – a geopolitical and economic nightmare. I can also envisage a situation in which the eurozone sticks together, but remains in a semi-permanent state of disappointment. I can envisage a small fiscal union. But I cannot envisage a situation in which an exit can be effectively and voluntarily negotiated.
The economics profession is doing itself no favours here. This is a real shame because the eurozone is sorely lacking macro-economic input. The recently agreed fiscal pact is an example of a political decision without consideration of its long-term economic consequences. The main result of the Wolfson prize, however, is to cement the irrelevance of macro-economists in this debate.
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Graham Bishop's earlier comments on the Wolfson Prize