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Dobbs - The NEWNEY Approach to Unscrambling the Euro

Dobbs - The NEWNEY Approach to Unscrambling the Euro

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Published by: onat85 on Jul 06, 2012
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The NEWNEY approachto unscrambling the Euro
Catherine Dobbs5 June 2012
 
 
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Contents
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The threat to the global economy.....................................................................................7
Very different economies in the eurozone 7
This time might be different: a bigger shock than Lehman 13
The need for a “Plan B” 17
Yolk and White countries 18
Possible endgames for the eurozone 18
2.
Achieving an orderly exit through the NEWNEY approach.............................................25
Assessing different approaches to the exit of one or more states from the Euro 25
The impracticalities of a surprise redenomination 28
The NEWNEY approach in concept 31
Key steps in the NEWNEY process 36
3.
Specific details on the NEWNEY approach....................................................................39
Setting the exchange ratio 40
Allowing FX movements and getting the exchange to happen in practice 45
Different monetary policies 49
Implications for private savings, domestic mortgages and international contracts 51
Implications for government debt 52
The stability of the banking system 54
The NEWNEY with more than 2 regions 55
Applying NEWNEY with a phased exit or with a small initial exit 55
4. Winnings and losers, and the politics................................................................................58
Evaluating winners and losers 58
The politics 61
Conclusions...........................................................................................................................65
Biography, contact details and acknowledgements..............................................................67
 
 
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Unscrambling the Euro
The bankruptcy of Lehman Brothers provides a pertinent lesson forthe eurozone. Prior to the Lehman collapse, there were clearlysubstantial underlying problems with global debt levels in general,and with the subprime mortgage and housing market in particular.These problems would have been painful to work through in anorderly way, but the disorder in the financial markets that followedthe collapse of Lehman, resulted in a seizing up of credit markets,and substantially greater impact on the global economy.It is evident that some of the problems around Lehman’s collapseresulted from regulators and policymakers having had nocontingency plan in place for how to deal with a situation such asLehman, and how to prevent the “domino effect” as the loss of confidence shifted from Lehman to other financial institutionsaround the world. These other financial institutions, in turn, thenfaced a collapse in liquidity and so withdrew credit from their “realeconomy” customers. The reduction in lending and credit, especiallyin areas such as trade finance, slowed the real economy. This“domino effect” magnified the impact of the collapse of Lehman,resulting in a global credit contraction and loss of confidence, whichin turn caused the first global recession since the Second World War.One or more member states leaving the eurozone, if this were tohappen in a disorderly way could, as will be shown, be a five to tentimes larger event for the global economy compared with theLehman collapse
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. There is an analogous “domino effect” to that seenwith Lehman, with the exit from the eurozone of even one country. If one country leaves the eurozone, it will be clear that membership of the eurozone is not “forever”. And so financial markets, speculators,corporations, and even citizens could start anticipating whichcountry could leave next. They would move deposits and assets outof financial institutions in what they perceive to be the countries thatmight exit next, resulting in a catastrophic loss of liquidity and creditin these “domino countries”. This loss of liquidity and credit could,
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This paper in no way forecasts that any country will, or should leave the eurozone. It was written tocontribute one idea to a debate on possible options should a country decide to leave.

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