M&G's Richard Woolnough, who sparked strong debate over his negative view on the euro, discusses why a new single-currency might be the best thing for the troubled European bloc.
Once unthinkable, the possible demise of the euro is now very much up for debate.
Well, among market participants - the politicians will not countenance it, despite the tectonic shifts in the eurozone and the profound strains on the single currency.
Put simply, the authorities' view is that the euro must be retained - not only for the survival of governments and financial institutions, but also to keep intact the dream of a United States of Europe.
So central is the currency to the ideal of the single economic bloc - an economy to compete with the US and Asia's emerging titans - that the notion the euro could fail is a great unmentionable in these circles.
In the view of market participants, however, this could go one of two ways: either there will be stability led by vigorous state intervention, or there will be huge chaos and uncertainty. Unlike the authorities, the markets publicly recognise the possibility of a negative outcome and have factored it in to the price of assets.
With the authorities stating that the scenario cannot occur, it sets up a battle between governments and capitalists. Recent initiatives to reduce speculative activities are just an early salvo in this war.
But even if the official view is that the euro cannot fail, surely it is inconceivable that the politicians and policy-makers have not given any thought to what might need to happen should it collapse. So what secret thoughts might they be having? How would they cope with the unthinkable?
If the euro ceases to be the financial system would be faced with financial calamity. The means of exchange would be questionable and, in extremis, the euro would become a worthless piece of paper. In addition, all existing legal contracts in bonds and derivatives would be denominated in a dead currency. Left unchecked, this collapse would probably destroy European capital markets and severely damage economies, with global carnage close behind.
First, the authorities would have to create new national currencies as a means of exchange. To solve existing euro contracts issues, you would need a one-for-one successor to the euro, so let's call it the ‘neuro'. We've been here before: the ECU was turned into the euro in the same way. This successor currency would then be legal tender in all European countries. But the big question is who would stand behind this supranational currency?
At present, the euro is the pooled responsibility of member states issued through the auspices of the European Central Bank. To maintain continuity, the neuro would have to be based on this same pool of responsibility. Again, there is precedent: the eurozone has had such a pooled currency before: the ECU was a basket of currencies.
Next, policy-makers would have to determine what the neuro should look like. If it was a basket primarily based on a new Deutschemark, then it would be a hard currency: savers would be very pleased while borrowers would be distraught. If it were a basket full of perceived weaker currencies, savers would be left poorer and borrowers would be relieved. A tough decision.
So how might they justify the national currency weights behind the neuro? They could weight it by GDP; attempt to create a neuro that is equivalent in value to an outside barometer of value like the US dollar; or base the weights on the old ECU. However it was done, at least the markets would have a continuity of contracts.
The consequences of the introduction of a neuro - on a date well-telegraphed in advance - would be far-reaching. Central banks could then set their own interest rates, print their own currency and influence exchange rates. Hopefully, they would all work together for the good of the eurozone. It could well be perceived as a radical and effective way of providing a middle way, so reducing the risk of financial Armageddon.
This type of pre-emptive action would also extend the life of the euro and buy breathing time for the authorities. If it is announced as an emergency exit policy - to be implemented only if required - it could even save the single currency.
At the moment, this may sound like anathema to believers in the euro dream, but it may well be the fact that Europe is not yet ready for a single currency. If so, the authorities should recognise the fact and halt - albeit temporarily - on their journey to achieving their ultimate goal.
fter all, the progress to monetary union has had setbacks in the past, and even ardent euro supporters should have a plan B if things go wrong. The neuro might be a significant part of the solution.
Richard Woolnough is the manager of the M&G Corporate Bond, Strategic Bond and Optimal Income funds. This comment was written for The Telegraph.
Third completed acquisition of 2018
March sales figures revealed
Three big drivers
No easy answers
Whatever the weather