"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Tuesday, December 14, 2010

Slovak Parliamentary Speaker Sulik Openly Considers Slovakia's Interests: Plan B, Exit Euro

Slovak Parliamentary Speaker Richard Sulik wrote an opinion piece in the business newspaper Hospodarske Noviny in which he openly discussed Slovakia's potential exit from European Monetary Union.  To my knowledge, this is the first high level politician to publicly say that exiting the Euro should be on the table.  His reason for a "Plan B"?  The current (mis)handling of the Euro and  the conflict of Euro membership and national sovereignty that smaller countries experience.

I used google translator to translate the essay into english.  Here is the full translated essay, emphasis mine:
Slovakia's efforts to join the euro area have been motivated by the prospect of a stable currency and solid rules. Specifically, I referring to the Maastricht criteria (in particular the maximum three percent deficit), Article 125 of the Treaty of Lisbon (every State shall be liable for its obligations alone) and the internal rules of the European Central Bank (redeem bonds Member States). I remember well how "strict guardians of Lithuania adopted the euro because the reference year exceeded the deficit by 0.07 percentage point. I also remember how Miklos trained first and then the beginning. Everything is quiet and we strpeli kvitovali also convinced that we will become members of the association, which comply with the rules.
Today, two years later, unfortunately, I have to say that the rules apply equally to all, or currently do not pay at all and that the proceedings of the European Commission is the responsible approach properly far. Already "rescue" Greece is mainly about saving the profits of foreign banks. Greeks have lived 30 years beyond their circumstances, because they ruled irresponsible socialists who they recently ruled us, and banks to earn it fair that you charge a premium on the interest for possible insolvency. Ireland is a similar case, with the only difference being that the banks decided to play the casino and real estate bubble inflated. State supported them in that, initially weakening control mechanisms and state guarantees. 
Responsible approach eurozone leaders would let banks share the outages incurred and not "produce" more and more new money that the ECB buys bonds of the Member States. It is irresponsible to other Countries' debt extended by eurovalu countries themselves and thus were into trouble. This way you can save Greece and Ireland, Portugal can be. Try the following to "save" Spain is gambling with the euro, let alone Italy. Italy's debt is higher than half the debt of Greece, Ireland, Portugal and Spain together.
Therefore it is high time, Slovakia ceased to blindly believe chatter area leaders and prepared a plan B.This is a reintroduction of the Slovak koruna. When we're too small a country to have a significant impact on the EU to act, we must at least protect the value created and composed of people living in Slovakia.

Source HERE.

Although Slovakia is not a large member of the EU by any means, and exiting the Euro is a logistical and operational nightmare, open challenges to the "benefits" of EU membership are not to be taken lightly.  They are indicative of a lack of EU leadership and of conflict and distrust amongst fellow EU member states.

I'm expecting more of this in the future.

Meanwhile, the issue of a Euro Bond is still being hotly debated with little apparent agreement amongst the larger EU members.  In my recent posts about the evolution of fiat money, I tried to describe the two approaches that are being taken: one by the US and the other by the EU.  The EU was difficult to assess, and that remains so.  Why?  There is absolutely no clear leadership in the EU.  EU policy is ad hoc - much more than US policy. However, the underlying issue: the exponential growth of unmanageable debt in a fiat debt based monetary system will never be fully addressed until the system collapses.  What we are witnessing right now are pathetic attempts to prop up an unsustainable system that is nearing its terminal phase.

5 comments:

Dave said...

Actually wouldn't be too hard to exit the Euro.

Just issue their own currency again, and let it trade against the Euro, and let people decide which currency they want to use. The market would easily take care of it.

Two key things though:

1. Only allow state taxes to be paid in the coin of the realm.

2. Back the coin with more gold than the Euro, marked to market.

Misthos said...

I agree that backing currency with gold is advantageous, but only if there is a significant revaluation, and the timing is correct, that is, fiat is just about to collapse. But so long as fiat is the standard, it makes sense to devalue. You play the game as it is, so long as it is. The rules of the game are only changed by the big players, or by catastrophic circumstances.

But in terms of leaving the Euro - it is difficult in that cash registers, computers, contracts of all sorts from leases to oil purchases etc... need to be re-done. A banking holiday would also be required, which itself would be destabilizing.

And if the new currency is free floating (unbacked or unpegged fiat), expect massive attacks on it in the markets. For example, if a heavily indebted country like Greece leaves the Euro, the new drachma would likely get attacked, interest rates would soar, etc...

The process of EMU integration would look like a cakewalk compared to the reverse process. I fear the periphery nations are doomed if they do, doomed if they don't. If austerity really cuts into the social and political fabric of a country, as I think it will, then all bets are off. Political decisions will be made irrespective of common sense - or at least, more so than they are today.

Jim Slip said...

Hi Misthos,

Could you do a series of posts about "modern monetary theory for dummies"?

MMT seems very fascinating but difficult to get to grips with, cause it turns prevalent notions upside down.

Misthos said...

Jim,

Sure thing. I alluded to MMT in my evolution of fiat posts, but I'll admit, I didn't get into detail enough - I merely referred to it without dedicating a good amount of time to it. I created this blog for people that have a foundational knowledge of the current crisis - unfortunately, MMT is out there in left field, it is extremely under-reported and not well known. Not even our media discusses this, and not even Ben Bernanke. There's a reason for that.

MMT is difficult to understand not because it is complicated, but because it is so unlike the way we are conditioned to think about money. We think of government budgets the way we think of our own budgetary constraints. But governments and households have very different limitations and powers.

Furthermore, most MMT material I have seen on the web is by proponents of it, and not enough critics of it. And many critics of our monetary system arrive at wrong conclusions because they are not familiar with how the monetary system actually works.

Think of MMT more as a way of looking at our actual monetary system and how it functions. Budgets, deficits, "funding" etc, are mere exercises on pieces of paper and do not represent constraints to sovereigns (that have a free floating currency) in the household sense - that is, the way budgets, loans, etc... affect you and me.

Finally, understanding MMT, in my opinion, gives us a better understanding of where we are heading.

Jim - now that I think of it - I should have done this a long time ago - thanks for bringing this up and I will begin a series of posts on MMT this week.

Jim Slip said...

Misthos, this is excellent. I am looking forward to it.