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Letter to the FT: EMU really is a locked door

Julian D. A. Wiseman

Abstract: letter published by the Financial Times on Monday 29th March 2010 entitled EMU really is a locked door.

Publication history: in the FT and at Usual disclaimer and copyright terms apply.

The following letter was sent to the Financial Times on Friday 26th March 2010 and published the following Monday, 29th March 2010 under the title EMU really is a locked door.

Sir, The FT has published a call for Greece to leave EMU (“A euro exit is the only way out for Greece”, 26 March), as always without specifying what would happen to Greek-law euro-denominated contracts.

Greece is sovereign, and hence can determine the meaning of Greek-law contracts; Greek law could be changed such that it “interprets” a euro as some number of new drachma. But which contracts would Greece so redenominate?

To reduce the cost of doing business in Greece, salaries have to be devalued: the whole purpose is to create employment and exports. So consider the position of a voter with a Greek-law mortgage, whose salary is now in devaluing new drachma. If the mortgage remains in euro then personal bankruptcy looms. So voters would demand that mortgages be redenominated.

So the assets of the banking system, the mortgages, have been devalued. The same could happen to the liabilities that take the form of Greek-law deposits. But Greece has been importing capital: the banks have borrowed in the money market. That is, the banks have been borrowing under the law of England and Wales, or of Germany. Greece cannot redenominate those contracts, but devaluing the assets and not the liabilities would kill the Greek banks.

So the government’s decision is to change no contracts, to bankrupt the voters, or to bankrupt the banks. EMU really is a locked door, and the fire brigade does not have a key.

There is an extra conclusion: keeping a non-trivial amount of money in a Greek-law deposit is a needless risk.

— Julian D. A. Wiseman
Paris, March 2010

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