Euro Exit; An Elegant Solution



Markets have been preoccupied all week with how the trauma in European debt markets will be resolved. Will Germany capitulate from their hard line stance and allow the ECB to print, or will France capitulate and be drawn in to stronger German led political union? Meanwhile, the Southern European members are being squeezed hard as global investors derisk their exposure throughout the Euro zone with a commensurate deterioration in trust and confidence. There is at this point, little clarity about the outcome. 

One enquiring mind has popped up with an elegant solution. Mark Tinker at Framlington Asset Management, and occasional contributor, takes the lead, 



“My tone is somewhat light hearted, but the intent is very serious. 

An obvious analogy is China and the US. We know that China, as a manufacturing nation, has pegged its currency to the US, an economic zone running a large current account deficit and has benefited to the extent that there are regular calls to have it named as a "currency manipulator". The resulting capital account surplus of China was then recycled through the debt markets of the US as Germany's has been through the convergence trade in the Euro zone. Is not Germany then guilty of exactly the same thing as China? If we agree that it is so, then should we not expect Germany to float the DM in the same way as China will float the RMB? 

Germany should with immediate effect re-denominate all assets into a new DM, which would almost certainly appreciate rapidly against the "Old" euro, probably by around 25%. It could then do as the Swiss have done and make it quite clear that it will target a new informal peg of around 120 (hence my flip comment about pegging itself to the Swiss Franc). This would then enable a lot of the capital currently hiding in bunds to flow back into the eurozone and relieve the liquidity crisis there, for

that is the real issue in Italy and Spain, a fear of a Euro break up meaning a 25% haircut in all assets. 

The German population would love to have the DM and the Bundesbank back and while the Eurozone would have slightly higher yields than now, so long as the ECB makes it clear that ultimately it will print to guarantee repayment of principal - as every other sovereign nation can - there is no reason why their bonds should trade worse than, say the UK. 

The euro survives, just with Germany now in the same position as the UK and Sweden, in Europe but not the Euro. The only losers are German Banks with assets now denominated in a depreciated currency, but as we know, the solvency issues of Greece, Portugal and Ireland are more than accounted for in Banks balance sheets already. This was never a solvency crisis, it has been a liquidity crisis triggered by fears of a currency crisis. Remove Germany and all your problems are solved. If they won't leave, then the other 26 should vote them out.” 

One can only hope that this cracking originality in approach also catapults Mr Tinker to the front of the pack for consideration in the Wolfson Economic Prize which will be awarded “to the person who is able to articulate how best to manage the orderly exit of one of more member states from the European Monetary Union.” With a prize of £250,000 we can simply be certain that his will not be the only entry!