By converting the Euro to a supranational means of settlement underpinned by Euro-National currencies, both devaluation and the Euro's survival may be achieved, albeit at heavy loss to creditors. This would, more than anything, come close to Keynes' vision for the Bancor, and give a localised Bretton Woods for the 21st century.
The Euro is the national currency of a country that does not exist. Though there is a continent of Europe, as there is of America, there has never been a country of the United States of Europe, and there probably never will be. The Euro is therefore not a currency as is the American dollar, and yet it is forced to masquerade as one—badly—by the Maastricht Treaty, in which the countries of Europe abandoned the right to produce their own genuine national currencies.
With the volume of the Euro being controlled by a supra-national authority (the ECB), and member states punished for breaching rules on government spending (the 3% maximum deficit and 60% accumulated deficit rules), the Euro is closer in function not to a currency, but to Special Drawing Rights as they were conceived of by Keynes at Bretton Woods. In his plan for a post-WWII international monetary system, Keynes proposed that a common supranational currency be used for international trade (the “Bancor”), while domestic currencies should be used for internal trade. The exchange rates between national currencies and the Bancor were to be fixed, with persistent trade deficit countries being forced to impose austerity and devalue, while persistent surplus countries were taxed Bancors, and required to stimulate their economies to increase imports.
Keynes’ Plan was scuttled by the USA’s insistence on its “first among equals” status after WWII, leading to the crisis that the global economy is in today. The Euro, with its half-hearted-hybrid structure as a currency that is not a currency, and its punitive rules on deficit nations sans stimulatory rules on surplus nations, has turned that crisis into a catastrophe. Keynes would have railed against idea that the Bancor should also be the currency of national commerce as sheer madness, given his prescient position that “above all, let finance be national”. Yet that is what the Euro attempts to be.
Some see the way out of today’s catastrophe as creating what does not exist—the United States of Europe. But if that were ever a possibility, it is a far lesser one after the damage done by Maastricht, and the Franco-German insistence on austerity for the periphery in this crisis. However, what is a possibility—and which has echoes in some of the contributions here (such as the “Nua” proposal from Gerald Holtham)—is to move the Euro closer to a continental version of Special Drawing Rights.
The Euro could be the currency of inter-European and international trade, while “sub-Euros” created by each of the nations of Europe could be used for domestic trade and, importantly, domestic financial arrangements. The disciplinary aspects of Maastricht—which are currently inappropriately directed at government deficits and are amplifying the downturn—would then be redirected at trade deficits within Europe instead (and matched by pressures to minimize intra-European trade surpluses as well).
The Euro-Drachma, Euro-Peso and Euro-Mark could be introduced at one-to-one parity with the Euro, and all financial assets and liabilities would be denominated in these national currencies rather than the Euro. These national currencies would then float freely for a period (say one year), after which they would be fixed in proportion to the Euro.
The obvious devaluation that would occur for the Euro-Drachma and Euro-Peseta would reduce their foreign debts—and force the nations whose banks over-lent to them to deal with the consequences. It would also end the currency flight that is currently occurring: a Euro-drachma would still be a Euro-Drachma, whether it resided in a Greek or German bank account.
The introduction of such a system could provide a rapid resolution to the current crisis. It could not be pain free, but it would be difficult to imagine that it would impose more pain than is currently being felt by Greece and Spain, or is about to be felt by other countries once the contagion passes on to them.
This system would also introduce what is otherwise impossible in the Euro: exchange-rate flexibility. Economists as widely apart ideologically as Wynne Godley and Milton Friedman observed long before the Euro began that it would fail (a) because it imagined that a market economy would reach a harmonious equilibrium on its own without government intervention—which Godley correctly characterized as a deluded neoclassical fantasy; and (b) because it pushed together widely disparate nations which Friedman noted were utterly unsuited to a currency union.
A step backwards by Europe from the dystopian fantastical object of a single currency, to a mini-version of what Bretton Woods should have been, could thus be a workable way out of this crisis and towards the political dream of a non-fractious Europe.