From The Milken Institute Review:
The
leaders of Italy’s new populist government say they do not want to
leave the euro, though no one believes them. After all, they campaigned
on the issue. And, until they were stopped by the president of the
Italian Republic, they tried to appoint Paolo Savona, a well-known
euroskeptic, as finance minister. Instead, they appointed him European
Affairs Minister.
In a recent book, Savona called the euro a
“German cage” and wrote that “we need to prepare a plan B to get out of
the euro if necessary ... the other alternative is to end up like
Greece.” In short, it is not surprising that the new government’s
commitment to the euro is in doubt.
Whenever the possibility that
some country might ditch the euro arises, voices of the establishment
are quick to offer a reality check. Abandoning one currency and
introducing a new one is just too difficult, they say. They point to the
years of planning that went into launching the euro in the first place.
And they warn that escaping from its embrace would generate problems
ranging from the serious (bank runs) to the mundane (retrofitting
vending machines).
Ultimately, though, purely technical
difficulties are surmountable. If Italy does decide to leave, the key to
success will be to learn from the experience of the many countries that
have changed currencies in the past. Here is a practical roadmap,
drawing on the imaginative and pragmatic devices that others have used
to ease the introduction of a new currency.
Lesson 1: Use a Temporary Currency
Those
who worry about technical barriers to changing currencies often point
to the time it would take to print notes, mint coins and put them into
circulation. That time could be greatly shortened by using a temporary
currency during a transition.
Latvia’s exit from the ruble area
in the early 1990s is a case in point. First, in May 1992, authorities
introduced a Latvian ruble as a temporary replacement for the old Soviet
ruble. Only months later, after due preparation, did they put the new
permanent currency, the lats, into circulation. Distinguished by some of
the most handsome coins in Europe, the lats served for 22 years until
Latvia switched again, joining the euro.
A temporary currency
solves several problems. For one thing, it can be run off quickly and
cheaply without all the elaborate counterfeiting safeguards of a modern
currency – it won’t be around long enough to be worth counterfeiting.
The
speed record for introducing a temporary currency seems to have been
set by the Soviet occupiers of eastern Germany after World War II. When
the Americans, British and French replaced the old reichsmark with the
deutschmark in 1948, the Soviets were caught flat-footed. As Nazi-era
currency that was now worthless in western Germany flooded into the
Soviet zone, occupation authorities hastily printed paper stickers,
which they stuck on a limited number of reichsmark notes to serve as a
temporary currency. Those were then replaced with a permanent currency,
which became known as the ostmark and lasted until reunification.
To
make things easier, there is no real need to issue coins in the
temporary currency. For example, when Kazakhstan switched from the ruble
to the tenge in the early 1990s, there was a period in which there were
no coins in circulation. Their place was taken by grimy little
fractional banknotes, which were a nuisance, but got the job done.
Nicely minted tenge coins came later.
A temporary currency can
also serve the useful purpose of deflecting public disrespect. If the
new currency is expected to depreciate (which seems a no-brainer if
Italy exits the euro) people are bound to think up some derisive name
for it and treat it with contempt. For example, a temporary Belarus
ruble issued in 1992 was popularly called the zaichik, or “bunny,” after a whimsical picture
on the one-ruble note. Later, after a degree of stability was restored,
a somewhat more respectable Belarus currency (absent bunny) was issued.
Giving the temporary currency the same name and denomination as
the old one, as was done in Latvia and Belarus, simplifies accounting,
signage and other technical matters. Following that example, Italy might
begin with a temporary Italian euro. A permanent new lira could
come later, after the government established credible monetary
management.
Lesson 2: Do Not Fear Parallel Currencies
Introducing
a new currency would be harder if it had to replace the old one all at
once, but there is no reason it would have to do so. Many countries have
eased the transition from one currency to another by sanctioning
parallel circulation during a transition period.
Sometimes the old
currency can be left in circulation for a while at a fixed exchange
rate with the new one. That is how the euro was first introduced, and
the same practice has been followed by the countries that joined the
Eurozone later on. Temporary parallel circulation makes sure that
everyone doesn’t have to spend January 1 standing in line at their bank,
and it gives technicians time to update automated parking lot gates so
that no one is trapped in a garage by the wrong coins.
Parallel
currencies with a floating exchange rate are also possible. These
currencies often develop spontaneously in countries experiencing
hyperinflation. While the ruble or peso or whatever remains the official
legal tender, people use a hard currency such as the dollar or euro
alongside it. Typically, the rapidly depreciating local currency
continues to be used as a means of exchange for small transactions while
the more stable foreign currency serves as a means of account and a
store of value.
In the hyperinflation case, parallel circulation
often ends with the introduction of a new national currency that’s fixed
in value relative to the unofficial parallel currency. For example, in
the early 1980s the value of Argentina’s peso was wrecked by
hyperinflation. As the peso became ever less dependable, people began to
use U.S. dollars as a unit of account and store of value. In 1985, the
Argentine government temporarily stopped hyperinflation by replacing the
peso with a new currency, the austral, which it declared to have a
fixed value of one dollar.
Then, when the austral began to circle
the drain in response to accelerating inflation in the early 1990s, it
was ditched in favor of a new peso – again declared to be worth one
dollar. Estonia in 1992 and Bulgaria in 1997 are other examples in which
parallel currency circulation preceded the introduction of a
new, hopefully stable national currency.
If Italy decided to exit
the euro now, the situation would be very different. Instead of moving
from a less to a more stable currency, it would, in
effect, be abandoning the euro in order to achieve the currency
depreciation needed to make its exports more competitive without going
through German-compelled fiscal austerity. That would make it a little
like running the Argentine movie in reverse. Instead of the euro
gradually coming into broader circulation as the national currency
became less stable, a temporary floating currency could be introduced
gradually alongside the euro, to be replaced only when the economy began
to stabilize.
What would motivate people to use the new currency?
One way to bring it into circulation would be to introduce it first
where people had no choice. For example, Italy could begin by printing a
temporary Italian euro, which at first would be used only to pay
government salaries, pensions and interest on the national debt, and
also be accepted for payment of taxes. Gradually, its use could be
extended as expectations of its exchange rate with the real euro
stabilized, pushed along by administrative means as needed.
Lesson 3: Default Early, But Not Often...
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