Whatever one thinks about Lord Wolfson’s euro-skeptical meddling, it certainly has been entertaining. The British baron’s offer of a £250,000 prize for the best ideas to deal with a possible breakup of the eurozone has brought all sorts of people out of the woodwork. (Including this precocious 11-year old.) But one of the most fascinating ideas on the shortlist has come from Neil Record — although I’m not sure that my takeaway was his main intent.
Suppose that a country does leave the eurozone — this was the starting premise of all the responses to Wolfson’s essay contest. Greece, as the weakest link, seems the most likely candidate. But on the other hand it’s possible that one of the strongest countries chooses to go its own way. Of course we’re talking about Germany. Whether it remains in the euro or decides to take its chances by introducing a new Deutschemark, the fact is that in the case of a euro breakup, Germany is where it’s at. Its fiscal position and reputation for prudence is among the strongest of all developed countries. If it were on its own then its currency would rise to reflect this. So, to the extent that you can choose, you will want to get your banknotes from Berlin.
Some of the economists on Lord Wolfson’s shortlist imagine a scenario where, even post-breakup, all euros are equal. This is not the case with Neil Record’s plan. In fact Record, a former economist with the Bank of England, reminds us that this is not really the case even today, in the absence of any breakup.
It is worth noting, to the surprise of many commentators, that Euro notes are not formally issued by the ECB, but by each member State National Central Bank. Each Euro note is accordingly marked with a prefix letter according to its issuer as follows:
So a Greek (or indeed any non-German resident) could sort through his or her notes as they acquire them, and pass all non-X prefix notes on to shops or back to the bank, and retain all X prefix notes, perhaps in the safe deposit box in Germany. This is as close to a free financial option that any individual will ever be faced with, since the chance of loss is nil (the cost of holding ‘X’ prefix notes is the same as holding any other prefix banknote), and even compared to a bank account, the lost interest is negligible. The opportunity of gain (even if the probability is small) is very substantial indeed.
Cumbersome? Yes. Crazy? Maybe not, if you believe in the merits of Record’s full contingency plan for a breakup of the eurozone. As to the value of contingency plans in general, remember that it has been more than a year and a half since the eurozone crisis broke out in earnest and, despite all assurances to the contrary, it’s not fixed, it’s not getting better and it may actually be getting worse (see Spain.) No one knows what the outcome will be, we only know what politicians are afraid to say — that a breakup of the eurozone might be inevitable. If you’re a European who has steadily decreasing faith that the politicians or the ECB can stabilize the situation then by now you are surely starting to think outside of the box. And you certainly wouldn’t be the first.
Record reminds us that
On 1 Jan 1999, national currency banknotes became ‘fractional denominations’ of the Euro. Exactly the same needs be done in reverse whenever [Record’s] Plan comes into force. So Euro banknotes will become ‘fractional denominations’ of new national currencies. This will mean that apparently similar notes (except for the prefix) will become worth different amounts, and the exchange rates between them will be highly variable.
Could X mark the spot?