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The Wolfson Economics Prize, in a competition launched in November 2011, asked economists around the world to produce a workable solution to the following question:
“If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?”
A team from Capital Economics led by Roger Bootle was the winner of the £250,000 prize.
According to the Policy Exchange, which manages the prize for the Charles Wolfson Charitable Trust, the winning entry “concludes that even though there would be some losers as well as winners from the exit of one or more members from the Euro, the net effect overall would be distinctly positive for the future growth and prosperity of the current membership – and for the wider world.”
Key points include:
- A new currency is introduced at parity with the Euro on day 1 of an exit.
- All wages, prices, loans and deposits are redenominated into it 1 for 1.
- Euro notes and coins would remain in use for small transactions for up to six months.
- The exiting country would immediately announce a regime of inflation targeting, adopt a set of tough fiscal rules, monitored by a body of independent experts, outlaw wage indexation, and announce the issue of inflation-linked government bonds.
But most notably:
- Redomination of debt (and default). It also recommends that government should redenominate its debt in the new national currency and make clear its intention to renegotiate the terms of this debt. This is likely to involve substantial default – perhaps sufficient to reduce the ratio of debt to GDP to 60%.
- An exit would best come unannounced. The paper proposes that key officials from the exiting country meet in secret one month before publicly announcing a day of exit or ‘D Day’. Eurozone partners and other international monetary organisations would be notified of D Day three days before – preferably on a Friday – when a public announcement is made that the changeover to the new currency will take place at the start of the following week. Immediately after this announcement, domestic banks and financial markets should be closed to prevent capital flight.
- Guidance on legal issues a must. The government of the exiting country and the institutions of the EU should seek to minimise uncertainty over the legal issues, for example by providing guidance on the validity of redenomination, the status of the exiting country with the EU, and the continuity of the Euro itself.
Visit the Policy Exchange site for more details and the full report of the winner and runners-up.