Can Pancakes And Pizza Save Greece?

Published in Investing on 12 April 2012

Lessons about economics can come from the most unlikely of sources.

A version of this article initially appeared on our US site,

The Wolfson Foundation recognises two or three exceptional works of history every year with a lucrative grant. This year, it's decided to take its mandate one step further, by awarding a prize to the person(s) with the best answer to the question: "If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?"

The finalists for the prize were announced last week. To mention a few... Roger Bootle of Capital Economics, a private macroeconomic consulting firm, suggests that countries should depart from the monetary union amid great secrecy over a weekend with temporary capital controls. Cathy Dobbs, a private investor from London, analogises the exit process to an egg, with some European regions serving as its white and others as its yolk. And Neil Record of Record Currency Management, an independent currency manager, avers that it's time for the whole monetary union to dissolve because "the argument that the single currency is permanent no longer holds true".

Though not a finalist, the proposal that caught my attention came from a dark-horse candidate named Jurre Hermans. According to Mr Hermans, a 10-year-old school boy from the Netherlands, Greeks should first be ordered to exchange euros for drachma at banks throughout the country. After collecting the euros, the banks would then surrender them to the Greek government. The government, in turn, would bake the notes into a "pancake or pizza". And finally, public officials would offer pieces of said pancake or pizza to the country's creditors -- presumably in a "take it or leave it" type of arrangement.

Believe it or not, it's not all about economics

It seems to go without saying that Mr Hermans submitted his proposal in jest. Yet, I can't help but think he may be onto something. Namely, turning Greek pecuniary obligations into pizza and/or pancakes is probably the only way to make them appetising to investors. To make the transformation inviting, however, it seems they'd need the assistance of Italians in the former case, and perhaps the Dutch in the latter -- we're not talking about gyros here. And this type of collaboration, of course, is generally possible only within some type of political union like, say, the European Union. And it's this point, levity aside, that many economists seem to forget.

Although this may be hard for economists to grasp, the eurozone is about much more than economics. I discussed this last week in a column about the historical and political reasons for the federation. And more recently, Wolfgang Munchau, an associate editor of the Financial Times, addressed the legal impediments to a break-up. Membership in the monetary union is not a contract, says Munchau, but enshrined in European treaties, which say that the currency of the European Union is the euro. While there's some wiggle room about entry, especially for countries that have opted out like the United Kingdom and Denmark, there is no wiggle room about exit. The latter simply wasn't contemplated by its founders.

As I've said before, the break-up of the eurozone isn't simply an academic exercise for economic professors to mull over and insert into the same algorithms that got the continent into the mess it's now in. While it's convenient for economists to blame politicians for the continent's sovereign debt problems -- as politicians do share some of the blame -- a more proximate cause was the financial crisis itself. Lest we forget, an aggravating cause of the latter was the financial deregulation spearheaded by economists. At the end of the day, in turn, meaningless exercises like the Wolfson Prize are little more than means of distracting attention away from the real culprits of the sovereign debt crisis.

It's not all bad news for investors

Of course, crises like the one in Europe aren't categorically bad for investors. In the middle of last month, for example, it was reported that American billionaire Wilbur Ross reaped a 105 million-euro gain from a five-month investment in Bank of Ireland (NYSE: IRE.US). And shares in the National Bank of Greece (NYSE: NBG.US), Greek shipper DryShips (NASDAQ: DRYS.US) and French telecom Alcatel-Lucent (NYSE: ALU.US) have all rallied this year, up 10%, 58% and 36%, respectively. But as I've warned before, given the uncertainty surrounding the situation, investments like these should be undertaken only by those comfortable with the attendant risk.

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DirtyDollie 12 Apr 2012 , 10:45am

How about this as a Euro exit mechanism?

Assess the proportion of total Euro GDP that the country (e.g. Greece) represents. This proportion of all of the Euros in circulation is to be converted to the new currency (e.g. New Drachma). The conversion is split such that the country leaving converts 50% and the remaining 50% is spread proportionately among the remaining countries according to national GDP.

I’ve listed some pros and cons but I’m no expert (if one even exists!) so any comment would be appreciated.

Pros: The “hit” is softened slightly by spreading the burden among all Euro countries. There is an amount of time where the country can still trade easily using its remaining Euros.

Cons: It could weaken an already fragile economy still in the Euro, leading to a chain reaction.

Questions: What happens to non-Euro countries with Euro holdings? What exchange rate should be used? Under what conditions would entry and exit from the Euro be allowed?

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