Eurozone Exit – Cost Effective Solutions

The Eurozone was created with a view to achieve higher growth, leverage synergies , reduce the cost of trade and transactions. During the course of existence of Eurozone , many of the benefits accrued to member countries. But it also enabled countries with less financial resources to raise funds from the markets at very attractive rates. This has resulted in huge borrowing by member states without looking into the feasibility of  accumulating a large debt relative to the size of the economies.

After the global crisis and reduced Economic growth rates in these countries, the huge debt started threatening the viability of well established Economic systems. Creation of Euro zone did not result in consensus of political views or harmonisation of the Fiscal systems  across the countries in the Union. The flexibility of countries to adapt the monetary policy was lost. The interdependence on other countries and banks from other countries in the zone had increased. There is an immediate need for the member countries to stick to a common code for managing the finances and follow the austerity measures as required. Despite an urgent need for such measures, there is no support for following these measures in toto by Political parties and members from the society in the member countries.

The immediate economic growth prospects for many of the member countries are very bleak and measures were taken by IMF and ECB to provide stimulus to the economies. Whatever the measures being taken, the scope for achieving a positive growth for next two / three years for some of these countries looks very bleak. The countries have to accept the fact that there will be a negative growth for the next  two/ three  years and take measures to kick start the growth in the following years. The austerity measures are required. If they do not want to follow the common code, then it is going to affect the performance and prospects for the entire European Union and make the task of revival more difficult.

To provide flexibility and higher level of adaptability, it would be a  better option to allow the members to exit the zone. There are fears that the local currency would be devalued and it will create a systemic crisis which would be even worse than we had seen so far. The process could be made smooth and painless by  implementing the following action points.

1. Peg the currency to the Euro. ( Initially)  Allow a Exchange  variation of 0.5% against Euro from the previous day for every day. Cap the maximum variation of the currency for the whole year to 5% . At the max, the currency can depreciate or appreciate by 15.7% in three years. This will bring predictability and certainty to the investors.

2. Government / Central bank of the exiting country have to play a major role in controlling the inflation / deflation by closely monitoring the Demand / Supply of products and services.

3. On the day of exiting the Eurozone, convert all the external loans outstanding with lenders from outside to the local currency loans on par with the Euro. For one Euro – one Local currency could be given. The lenders benefit / lose as and when the Currency appreciation / depreciation takes place.

4. Continue the Aid programmes as planned by IMF and  ECB.

5. Reduce the Foreign Debt. Through Restructuring of the debt and debt reduction by negotiations . Extinguishing the cross balances of debt with other countries, banks from other countries and others. This strategy could be adopted for all the countries in the Eurozone by creating a mechanism whereby overall debt reduction could take place.

6. Bank Lending. Provide incentives for banks to lend . Set higher targets for  credit / deposit ratios . Focus on lending should be to create manufacturing industries and Entrepreneurs.

7. Since most of the banks are weak and require additional capital, the government has to induct more capital in to these banks.

8. Considering the poor immediate growth prospects, it would be difficult to achieve a viable economic model with the outstanding loans and the servicing costs of these loans. Hence, the country exiting the zone could be allowed to print money without creating Debt. This limit could be set at 25% of the total currency in circulation.

9. Prepare a comprehensive turn around plan for the country with a defined objective of increasing the competitiveness rank in three years. Identify the items imported which will not help to improve the productivity in the immediate future and reduce the import of these items to improve the trade balance.

10. Continue the free flow of resources with the  other Euro Zone countries.  The free flow of people, resources should be continued without any restrictions.

11. Focus on Manufacturing growth. Revive the old  industries and give incentives for setting up Small scale and Medium Scale industries. Develop county wide vocational training plans and give a big focus on vocational education on the similar lines of the practices adopted in Germany.

12. Develop the Tourism, Education and Services Sector. Create Specialised growth zones for these sectors. This will create lot of  employment.

13. Apart from focussing on creation of additional employment, formulate strategies for developing large number of entrepreneurs. This could be facilitated by National vocational training programmes. For example India has the largest number of entrepreneurs in retailing.

14. Government could guarantee all the deposits made in the banks. Since the currency is pegged to Euro, the flight of deposits to other countries could be reduced to a great extent.

15. Since the growth prospects in the immediate future is very bleak, there is an immediate need to put austerity measures in place. The government can identify all the non essential expenditure and postpone them by three years. The pension to the employees for three years can have a cap. There will be a reduction for those who are getting very high pension. Freeze the recruitment in the government. Freeze the salaries at the present level for two years.

16. Create new manufacturing zones. Announce fiscal incentives for large investments. Liberalise FDI rules. Open Most of the sectors for FDI.

17. Create a National Revival fund. Request the Wealthiest and those who are in high income bracket to liberally contribute to this fund.

18. The member exiting for all practical purposes to be treated as a part of the Euro zone even after exit and Status quo could continue in terms of Political, Economic and Trade relations. The only difference would be the flexibility of the exiting country to decide its monetary policy and the effects of the performance of the exiting country would not have any immediate bearing on the Eurozone as a whole.

R.Kannan