Last Updated: 3 June 2023
Could Germany and the Netherlands leave Europe’s single currency to set up a northern version of the euro, or “neuro”? This may be the least painful solution to the eurozone crisis, says Alex Gloy, founder and chief investment officer of Lighthouse Investment Management
IU.eu: What’s the endgame for the euro?
Gloy: I can’t see any other conclusion than a break-up of the eurozone. Intra-European trade balances show that only Germany and the Netherlands are actually benefiting from the European single currency. Greece, Portugal, Spain and also France to some extent are suffering from structural deficits.[Gloy’s assertion is backed up in the chart below—IU.eu comment]
It is basic economics that to finance a trade deficit either the private sector needs to unsave (ie, borrow more) or the public sector must do so.
Let’s take Greece as an example, whose negative trade balance currently leads to a financing requirement of around €2-3 billion a month, or over 10 percent of GDP a year. Even if a country like Greece defaults, which gives it short-term relief when it comes to the payment of interest and capital on its debts, this doesn’t solve the problem of competitiveness.
If a country exits the euro it will probably default anyway. So if you’re going to default it would make sense to leave the single currency at the same time. That way you only get punished once.
I think such a combined devaluation and default would also be in the best interests of the Greek people, since the current austerity measures are killing the economy. Local companies can’t repay their debts to the banking system, which leads in turn to more government bailouts, an unsustainable situation.
IU.eu: This sounds logical. But why hasn’t it happened yet? Or, perhaps, why is such a move not being allowed to occur?
Gloy: Clearly, if one country leaves, the market will immediately speculate on which eurozone member or members will follow suit. There will be bank runs in affected countries, too. If you’re a Greek depositor and you suspect that your money is about to be converted to drachma, you’re going to take it out and move it to another European country.
In fact, some banks in Munich are currently advertising openly to Greeks that they should move their money to the safer German banking system.
In other words, a scenario of countries leaving the euro one-by-one is likely to be extremely chaotic, involving major banking failures.
IU.eu: Are there any other ways out of the current mess?
Gloy: Yes, I think the least painful way out is for the major creditor countries—Germany and the Netherlands—to leave the euro first, before everything else crumbles.
These two countries could create a new currency, called the neuro, or Northern Euro, for example. This would make German savers happy, while taking the pressure off the remaining members of the single currency. Over time the neuro would probably appreciate, and holders of the euro would be free to switch some of their assets into it.
IU.eu: How likely is this to occur?
Gloy: Given the current stance of EU politicians and central bankers, it’s very unlikely. But it’s the least worst of the outcomes, by far.
I have a tough time understanding how reasonable people can think that throwing more debt at Greece can solve anything. It seems some politicians, bureaucrats and bank bosses are hoping that things will blow up only after they have retired from their current jobs or received their next bonus.