The Wolfson Question
A Reflective Essay by Edward Hugh“
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 Euro should not exist, but it does. I am certainly not the first, and surely willnot be the last observer to notice this otherwise trivial historical detail. Accordingto Lombard Research Chief Economist Charles Dumas, the Euro is a form of “suicide pact” (City Wire, 2012), but the Hellerian Catch 22 twist which makesthis pact so, so special is that the threat of ending the Euro could easily -viacontagion and balance sheet effects - transform it from being simply a localEuropean piece of collective insanity into a thoroughly global one. That is tosay, we do have a choice, we can either all be hung out to dry separately, or wecan be hung out together, and at one and the same time. Unfortunately, at thisstage of the game there are no neat and easy solutions left, which is not thesame as saying there is nothing to be done.To anticipate the conclusions reached at the end of this essay, no sane personwould willingly leave the Euro System as it is currently set up on an individual,go it alone, basis, whether the agent in question be one of those supposedlyproblematic pupils, or one of the theoretically sound teachers who has simplybecome tired of the energy drain associated with having to discipline so manyirremediably naughty children. For a variety of reasons neither one nor the other will chose to move-on being of sound mind. Which leaves with the other option,“whom the gods would destroy they first make made”, meaning in this sensethat the big risk of the current policy strategy of Europe’s political leaders andthe IMF is that the essentially politically destabilise a number of EU countries –whether on the periphery or in the core – leading to extreme solutions andpolicy decisions with which rational agents would normally not wish to beassociated.
Preamble: Why No One Will Leave Voluntarily
The principal issue impeding exit is not the one of the presence of sunk costs,but rather existence of non-linear credit and currency impacts - in either one or the other direction – impacts which could not be envisaged in the pre-Euro eraduring which most of the critics of the common currency cut their theoreticalteeth.The only conceivable way a deliberate decision to leave could actually be takenwould be as a result of one or more of the respective agents being actuallydriven “insane” by the constant painful efforts involved in trying to retain the pinin that grenade they are holding as they are driven to ever more desperateefforts in a vain attempt to try to stop it going off in their face. Could, for example, Hungary’s leader Viktor Orban be about to offer us an early prototypefor the kind of road map which some of the participants might need to follow inorder to reach the point whereby they actively decide to leave? In Hungary’scase, of course, the departure would be from the EU, not the Euro, but the point