TREATY FOR EURO TRANSITION

Do you know how many European summits have been held to tackle the economic debacle or should we say the Euro crisis?

It is hard to say. Every new European summit is announced like the last chance. Meanwhile I guess the only leader still standing since the beginning of all these crises is Angela Merkel. All the others have been thanked for their loyal service to their countries and kicked out by an increasing frustrated population.

The question is, why this stubbornness, what makes these politicians not understand economic cycles or economic logic. It is not like we just started studying economy. Great economists have existed, written books and helped us understand economy.

Ok, it is true that others have come along and have been creative in changing or altering the natural cycle of economy with the help of centralized planning. Yes, I am talking about Keynes.

In the long run, however, these artificial policies will eventually hit the wall. 

The question is how much longer can the EU drive up the debt burden before they understand that it is unsustainable?

Actually, the european politicians seem to be the only ones that have missed their math classes, since the market has already given up on the Euro.

It is inevitable, no matter, how much these pseudo-politicians try to grab onto the Euro, or try to convince the public, or should I say themselves, that the Euro is a valid idea, that the Euro will finally collapse.

I am sure that the smart heads of the EU already started working on an exit policy, but if we see the way they have been dealing with the problems so far, there is little hope they will come up with a believable and successful plan.

So, although I think we should completely abandon the fiat money and centralized monetary system that has driven us to the actual disaster, I don't think we will be able to get there without catastrophic wars. Let me try to give a transitional/pacific and workable solution.

1st Step: Dual currencies in the actual EMU countries.

Some countries will function with their own currency and the Euro.

All local services, products, work, etc will be traded in the local currency and that currency will float against the Euro, which will still be the currency in other countries like Germany, France, The Netherlands, Finland, Austria, Luxembourg, etc. The countries that think they can benefit from a strong currency because they mainly trade highly advanced and technological goods.

Countries in the periphery like Portugal, Spain, Italy, Greece and Ireland would go back to their former currencies, back to the values they had at the beginning of the Euro and starting floating (read devaluing) from there. So the local currency would again be used by the countries for day to day transactions, while companies could still do international trade or european intratrade in Euros. Companies would only have to check the daily rate of their currency against the Euro to quote their price. This will also allow other countries that do not make part of the EMU to peg their currencies to this system.

For example a company in Spain that would have a cost price X + margin = sales price, would convert that price into Euros and a company in Germany or in Portugal would be able to buy that product in Euros.

Example:

Cost price + Margin = Sales price (Convertion rate) = Sales price in Euros

1000 pesetas + 20% = 1.200 pesetas (1 Euro = 200 pesetas) = 6 Euros

A company in Germany could disburse 6 Euros (the German currency) for that product. The spanish company will receive 6 Euros that it will be able to keep in Euros or convert into Pesetas, depending on its needs. Spanish banks will have a dual balance, like they had in the introduction phase of the Euro, a value in pesetas and the corresponding value in Euros (at the daily rate).  People will be able to keep Euros in savings bank accounts as reserve currency, although local transactions would be done in pesetas.

This will allow the spanish central bank to keep Euros and have the money to pay imports by Spanish companies and keep the spanish central bank within and supervised by the ECB system.

All of a sudden the Euro could really become a reserve currency, since it will be backed by strong economies and even other countries in the world would be interested in buying Eurobonds. (A % of the Eurobonds could then go to EU structural funds to invest in modernization of peripheral countries productivity)

This will give the time for countries in the south to readapt to global economy.

Travelling tourists will still be able to go to these countries and change their Euros into local currencies, knowing the rate they will receive, since it will be an open and public rate. It is up to the countries to have legislation to counter profiteering from the exchange in the exchange houses or banks.

Electronic purchase would not have a problem since there would be no exchange service delivered and the daily rate would be applied by the banks.

This however leaves still a significant problem: What will happen to the debt countries would have in Euros?

Different possibilities are possible. They could just be translated into local currency at the beginning of the transition phase but this would again create an extra punishment on the people of the countries.

2nd Step: Write off the debts

These debts need to be written off. There needs to be a significant haircut to make the debt burden sustainable and payable to these countries.

These debts exist because for a big part they were created by fractional banking money. This would mean that especially banks will have to write those debts off. This would indeed be devastating for banks but this would bring them back to their real value and not their actual inflated reality.

Banks and bank shareholders would be the losers of such a process but not all the banks, since there are many institutions that have not engaged in such behavior. These entities would continue to service their customers. Countries and the ECB would have to guarantee the minimum security deposits in every country and maybe create a state bank that would in the transition phase absorb the deposits and control bank runs. 

All of a sudden sound capital (capital from savings) would be liberated and would again find a reason to invest in countries and a renewed economy.

This however would only be a transition phase until we go back to (capital based money). Money that would be based on a basket of products (gold, silver, gas, oil, agricultural and industrial production capacity, savings). 

We need a competitive monetary system. The idea that a bunch of white folks (untanned) sitting in their ivory towers in Frankfurt or in Washington can decide the price of money is just absurd. Politicians need to go back to school and understand the creation of capital and wealth and later explain it to their population.

I know there are many more details that would have to be taken into consideration but at least the EU would not lose its face and gain extra oxygen to reinstate a competitive environment.

The path we are walking now is doomed to fail.

Most europeans are proud of Europe. They are proud of what was achieved, free movement of capital, people, services and products. They love to be able to trade with each other, to go study/work abroad, move around freely, etc. but they did not sign for this Europe. 

The actual Europe however, instead of enhancing the growth of their citizens is driving them into serfdom and poverty and are using the Euro for this purpose.

James Tector,

Liberté, Egalité, Fraternité