Below is a text of an article written on 27 September and sent to Financial Times Editor. I received no reply, so it is published on my blog.
During two days of intense discussions during IMF/WB annual meetings world leaders finally found an effective way to stop the eurozone crisis. After years of fiscal profligacy and rising public debt, after months of unprecedented monetary policy accommodation, including buying junk bonds by the ECB, they decided that what eurozone needs is more deficit, more debt and more monetary accommodation. So expect the ECB run by Italian governor to cut rates and continue buying Italian bonds, and expect governments to provide more taxpayers money to refinance PIIGS governments at yields that markets would not accept.
This strategy will lead to disaster. Think about eurozone method to handle Greek problems 12-18 months ago, and apply it to Spain and Italy today. And the environment will be tougher, because in the last 12 months global economy experienced strong growth, while now PMIs and other indicators suggest that global economy will be sluggish at best.
We need a completely different approach. Countries with large debt and slow growth or recession need to restore competitiveness, while Germany should reduce its current account surplus with the rest of the eurozone. There is one simple way to achieve this much desired result. Europe needs a new euro. To simplify my argument assume that new euro is introduced on January 1, 2012. Germans exchange euros 1:1, Greeks exchange two old euros for one new euro, Italian have the exchange rate set for example at 1,5 old euro for 1 new euro. By the way, such operation will not require exchanging banknotes, the old ones could stay.
Once this operation is completed, Greek economy will become very competitive. Greek public debt will be the same, around 160 percent of GDP, but Greek wages will fall by half making the economy very competitive and able to growth fast. So Greeks will be able to pay their debt. European banks will have large foreign exchange losses, but government can step in early providing proper capital buffers and taking temporary control over systemically important banks. Of course in anticipation of this operation Greeks and Italians will try to shift their savings from their home countries to Germany, so Germany will become net importer of savings, a much desired outcome.
After few years governments will be able to sell their stakes in banks making billions of new euros in profits. Eurozone will survive, with no need to expel Greece or any other country.
Europe does not need bigger bail-out fund. Europe does not need more money printing. Europe does not need bigger public spending. Europe needs new euro. __