CAN THERE BE AN AMICABLE DIVORCE - A WAY FORWARD - Summary and Analysis of The Euro: How a Common Currency Threatens the Future of Europe - Joseph E. Stiglitz

Summary and Analysis of The Euro: How a Common Currency Threatens the Future of Europe - Joseph E. Stiglitz (2016)



The last chapter described an agenda to make the euro work, and I believe that making the reforms suggested is the first-best course. However, while I think it is eminently doable, there is more than a small probability that it will not be done. In that case, there are only three alternatives: First is the current strategy of muddling through—in other words, doing the minimum to keep the eurozone together but not enough to restore it to prosperity. Second is the creation of the “flexible euro,” described in the next chapter. The third option is a divorce, which Europe should strive to be as amicable as possible.1

In this chapter we discuss what a friendly separation could look like, not necessarily into 19 different currencies, as existed prior to the eurozone, but into at least a few (two or three) different currency groupings. The central message of this chapter is simple: an amicable divorce is possible. In fact, some of the institutional innovations that would facilitate that divorce, making use of 21st-century technology, would also in time improve the overall performance of the economy.2 And to demonstrate the argument that such a divorce can be done without high costs either to the country leaving or to the rest of the eurozone, I illustrate the analysis by looking at the case of Greece,but a similar analysis would apply to any other country contemplating leaving the eurozone. Is a Greek exit—or Grexit—possible without destroying Greece’s economy or imposing high costs on the rest of the eurozone? If Greece could manage, presumably so could countries that are far better off. There will, of course, be costs. Monetary arrangements matter, and leaving the eurozone is a big change. But there are huge costs in the current strategy of muddling through—as shown in chapter 3. For the eurozone as a whole, we calculate them in the trillions of dollars. For Greece, in depression without end, the losses today give but a glimpse of the losses going forward. A rational calculus has to set these known and persistent costs against the risks of a divorce. At least with a divorce, even if there is a rocky start to the new life, there is the upside potential of an end to depression and the start of real growth.3 This chapter suggests that in a reasonably well-managed amicable divorce Greece would do far better than it is doing under the current programs imposed upon it by the Troika.4

There are, of course, political dimensions that economic calculus ignores. And those political dimensions are multifaceted. The divorce would restore dignity to the Greek people, who have been treated shabbily by Germany and the Troika; it would restore democracy—Tsipras’s acceptance of the Troika demands, after 62 percent of the population had voted in a referendum against the austerity program, removed all doubt that their economic sovereignty had been forfeited.

The final section of the chapter explains that if there is to be a limited breakup of the eurozone, it makes more sense for Germany to leave, instead of the countries around the periphery. We conclude with some remarks about why it is so important to have an amicable divorce.


There are several difficulties in managing an exit: managing the fiscal deficit, the current account deficit, and the debt; creating and maintaining a stable banking system, with a stable supply of credit to finance new investments; and creating a new financial transactions system.

The 2008 global financial crisis and the subsequent discussion of financial sector reforms highlighted the failures of financial markets and the enormous consequences of these failures for the economic system. These included excessive volatility in credit creation, with a misallocation of capital and a mismanagement of risk; more credit going to the purchase of fixed assets rather than to the creation of productive assets; excessive and volatile cross-border flows of short-term capital, leading to volatility in exchange rates and trade flows; excessive charges for the running of the payments mechanisms; and an array of socially unproductive practices, from market manipulation to insider trading to predatory lending. I’ve described the macroeconomic consequences, where misguided credit flows to the periphery countries created the imbalances from which Europe is suffering still.

A monetary union is about money and, more generally, a country’s financial system. It was dysfunctions in the eurozone’s financial system that led to the crisis; it was restoration of financial stability upon which the ECB and the Troika focused—with seemingly little regard for the consequences of the lives of the people affected. Hence as, say, Greece departs a failed monetary/financial system, the relevant question is, what would replace it? The normal presumption has been that Greece would go back to the drachma, with all the problems associated with that. Those depicting this alternative typically ignore that in the last, say, two decades of the drachma, Greece grew far faster with lower unemployment than in the almost two decades since entering the eurozone.

But much has happened in the past four decades. Modern technology provides the basis of a new financial system. Greece doesn’t need to go back to the past. It can create the financial system of the future—the kind of financial system that current special interests within the financial sector, wanting to preserve the huge rents that they garner for themselves, have prevented us from creating. The following sections describe briefly the key elements of such a system—a low-cost “medium of exchange” for facilitating transactions and a system of credit creation focused on the real economy, managed in a way far more conducive to macroeconomic stability than the current system.


Our banking and monetary system serves multiple purposes. One of them is as a medium of exchange. The world has several times made a change in the prevailing medium of exchange. Gold was once used; then, at least in the United States, there was a move to the bimetallic standard, where gold and silver were used, and finally we moved to paper (or “fiat”) money. For years, it has been recognized that it would be far more efficient to move to e-money, away from currency. A Grexit could provide an opportunity for doing so—in a way that would facilitate the Grexit and strengthen the Greek economy.

As various pundits considered the potential Greek exit from the eurozone, articles in the press appeared about the logistics and whether it would be possible for Greece to get enough currency printed, how they would manage a switchover to the drachma—dealing with the conversion of bank accounts, designing, printing, and delivering a new banknote, and how to impart value to the new currency. Greece could not very well begin printing money before it leaves the eurozone, and it was not clear what would happen in the interim.5

People who ask these questions apparently have not noticed what has happened to our payments mechanism—the way we transact with each other. Currency, those funny pieces of paper, with faces of famous people or buildings on them, are mostly a relic, just as gold and silver were once the key part of the payments mechanism but are no longer. We now have a much more efficient electronic payments mechanism, and in most of the world we could have an even more efficient one, if it were taken out of the hands of the monopolistic financial system. Electronic transfers are extraordinarily cheap, but banks and credit card companies charge exorbitantly for the service, reaping monopoly profits as a result.6

Electronic money is more convenient for people on both sides of the transaction, which is why it has become the dominant form of payment. It saves the costs of printing money, which has increased as the sophistication of counterfeiters has increased. It has a further advantage, especially in countries like Greece where small businesses predominate—it significantly curtails the extent of tax avoidance.7

With electronic money, leaving the euro can, in principle, be done smoothly, assuming there is cooperation with other European authorities. Upon a Grexit, the Greek-euro would instantly come into being. It would be the money inside the Greek banking system. In effect, this money would be “locked in.” But anybody could transfer the money in his bank account to that of anyone else. Thus everybody has, in effect, almost full use of his money.8 The Greek-euro would be just like any other currency, with a well-defined value relative to the ordinary euro.

Most individuals today have accounts; only the very poor are “unbanked,” and in recent years governments and NGOs, like the Gates Foundation, have been making great efforts to bank the unbanked. The government could quickly create new bank accounts for the few people who remain unbanked. In most countries, government pension payments are now transferred through bank accounts, partly to reduce the risk of stolen checks, partly to reduce the outrageous charges that are sometimes charged by check-cashing services.9


Earlier in this chapter, we noted the successive changes in monetary arrangements, in the “medium of exchange.” A big advantage of the use of fiat money was that one could regulate the supply. When gold was used as the medium of exchange, when there was a large discovery of gold—or when the gold supply increased as Spain conquered the new world—there would be inflation, as the price of gold would fall relative to other goods; if there were few gold discoveries, then there would be deflation. Both caused problems. Deflation, for instance, would redistribute income from debtors to creditors, increasing inequality and imposing hardship. America’s election of 1896 was fought on the issue of the money supply. The debtors wanted to increase the money supply by moving from gold to gold and silver, a bimetallic standard.10

While the modern financial system based on fiat money didn’t suffer from the vagaries of gold discoveries, it suffered from something even worse: volatility in the creation of money and credit by the banking system, without adequate regulation, giving rise to the booms and busts that have characterized the capitalist system.

Banks effectively increase the supply of money by increasing the supply of credit. In a modern economy, central banks regulate, typically indirectly, banks’ creation of money and credit. They are supposed to do it in just the right amount, so there is a Goldilocks economy, neither under- or overheated but “just right.”


There is a problem in this system: because the central banks’ control mechanisms are typically very indirect, the economy is often over- or underheated. Sometimes there is too much credit creation, leading to an excess of aggregate demand, and prices rise; there is inflation. Sometimes there is a lack of demand, and prices fall; there is deflation.

Part of the reason for this failure is that while central banks can regulate the supply of credit reasonably well, they can’t (or more accurately don’t) regulate the use to which the credit is put. Much of the credit goes to buying preexisting assets, like land. What determines whether the economy is over- or underheated is the purchase of new goods and services (whether for consumption or investment). Thus, after the 2008 crisis, there was a massive increase in liquidity, as the Fed pumped money into the economy. But relatively little of this went to buy goods and services in the United States, so in spite of the huge expansion of the money supply as conventionally measured, the economy remained weak.11

In short, even with fiat money, there may still be a deficiency of domestic aggregate demand—a deficiency that could be easily corrected: there are individuals and firms who would like to spend but cannot get access to credit. As I have repeatedly noted, that is one of the central problems in Greece and Spain. The ECB, with its belief in markets and its misunderstandings of monetary policy, has devoted little attention to the flow of credit. A near-zero interest rate does not mean businesses can get access to credit at such a rate—or at any rate.

In spite of the single market, there is not a single lending rate. Indeed, the disparity in lending rates is part of the divergence built into the eurozone system. The individual countries, which have given up control over their own monetary system, have no way of trying to equalize the cost of capital, to firms, households, or even to government. This is the unlevel playing field that is inherent in the current euro system.


The banking system is central to the provision of credit. There is the worry: Won’t leaving the euro lead to the crash of the banking system, and at minimum a severe heart attack for the economy? Indeed, from all accounts, it was the threat that this would happen which led the Greek government to give into the demands of the Troika in the summer of 2015.

But again, this is a false fear. The traditional view of banking was based on a primitive agriculture economy. Farmers with excess seed—with harvests greater than they wanted to consume or plant the next season—could bring the seed to the bank, which would lend, at interest, the seed to some farmer who wanted more seed than he had, either for consumption (say, because he had a bad harvest that year) or planting. The bank had to have seed deposits in order to lend. In effect, those worrying about where Greece would get the money necessary for running its banking system have in mind this corn economy: the Greeks have no corn to put into the new banking system, and why would any foreigner put his corn into the new Greek banks?12

But this reasoning again totally misses the nature of credit in the 21st century. In a modern economy, banks effectively create credit out of thin air, backed by general confidence in government, its ability and willingness to bail out the banks, which includes its power to tax and borrow. The euro, however, has limited those abilities, and in the absence of a banking union, has thus undermined national banking systems.


Once we restore a country’s economic sovereignty, as the country—say, Greece—leaves the eurozone, its ability to create credit is largely restored. Think of this most directly as occurring through a government bank. It can add “money” to the payments mechanism by lending money to a small enterprise with a proven reputation that wants to build a hotel on an island where the demand for hotel rooms has persistently exceeded supply.

The government simply puts more “money” into the bank account of the enterprise, which the enterprise can then use to pay contractors to build the hotel. Of course, in providing credit there is always a risk of nonrepayment, and standards have to be established for evaluating the likelihood of repayment.

In recent decades, faith in government’s ability to make such evaluations has diminished, and confidence has been placed in the private financial system. The 2008 crisis, as well as other frequent crises that have marked the last third of a century, have shown that that confidence has been misplaced. Not only didn’t the banks make good judgments—as evidenced by the massive, repeated bailouts—but they systematically failed to fulfill what they should have seen as their major responsibility, providing credit to businesses to create new jobs. By some accounts, their “real” lending amounts to just 3 percent of their activities; by others, to some 15 percent. But by any account, bank finance has been absorbed in other directions.13

There were always obvious problems in delegating the power of credit creation, backed by government, to private institutions: they could use their power to benefit their owners, through what we defined earlier as connected lending. Regulations circumscribed this, motivated by the experience of bad lending perhaps more than by the implicit corruption and inequality to which such lending gives rise. But circumscribing connected lending didn’t address the key underlying problem: credit is scarce; giving private banks the right to create credit with government backing gave them enormous “economic rents.” They could use this economic power to enrich themselves and their friends. Russia provides the quintessential example: those with banking licenses could use that power to buy enormously valuable state assets, especially in natural resources. It was through the banking system that the Russian oligarchs were largely created. In Western countries, matters are done more subtly—but creating enormous inequality (though not of the magnitude of Russia).

In many cases, they lend money to those whom they “trust” and judge creditworthy, with collateral that they value: in short, the bankers lend money to those who are similar to themselves. Even if Banker A can’t lend to himself or his relatives, Banker A can lend to the relatives of Banker B, and Banker B can lend to the relatives of Banker A. The fallibility of their judgments has been demonstrated repeatedly: overlending to fiber optics at one moment, to fracking at another, to housing in a third.

There is a second danger to the delegation of the power of credit creation to private banks. Throughout history, moneylenders have had a bad reputation, because of the ruthlessness with which they exploit the poor, especially at moments of extreme need, where without money they, their children, or their parents might die. At such times, there is an enormous asymmetry in bargaining power, which the moneylenders sweep in to exploit. Virtually every religion has tried to proscribe such exploitation, prohibiting usury, and in some cases, even interest. Somehow, in the magic of neoliberalism, this long history was forgotten: bankers not only didn’t suffer from the stigma of being called moneylenders, they were elevated to being the paragons of capitalism. In the enthusiasm over their new virtues, as linchpins in the workings of the capitalist system itself, it was simply assumed that such exploitation would not occur, perhaps in the belief that competition would ensure it couldn’t happen, perhaps in the belief that with the new prosperity of workers, citizens wouldn’t let it happen.

All of this was wishful thinking. Freed of constraints, bankers, our 21st-century moneylenders, have shown themselves every bit as ruthless as the moneylenders of the past; in fact, they are in some ways worse, because they have discovered new ways of exploiting both the poor and investors. They have been moving money from the bottom of the economic pyramid to the top.14 The financial sector has enriched itself on the back of the government’s credibility, without performing the societal functions that banks were supposed to perform. In doing so, the financial sector has become one of the major sources of the increased inequality in Europe and around the world.15

Even given this history, the government may want to delegate responsibility for making credit decisions to private enterprises, but it should develop strong systems of incentives and accountability, such that the financial system actually focuses on lending for job and enterprise creation and so that it does not make excessive profits as it performs these functions. This can be put another way: the government should be adequately compensated for its backing. In effect, in the current system all the “value” of the underlying government credit guarantee is captured by the private sector.16


Here is one possibility for addressing this issue and providing for greater economic stability—one that a country leaving the eurozone and its strictures and legal frameworks could avail itself of. First, the central bank (government) auctions off the rights to issue new credit. The amounts would be added to the “money” that is within the financial system. The magnitude of net credit that it allows to be added each month will be determined by the country’s central bank on the basis of its assessment of the macroeconomic situation—that is, if the economy is weaker, it will provide more credit to stimulate the economy. The winners of the credit auction then allocate this “money” to borrowers, on the basis of their judgments about repayment capacity, within the constraints that the central bank may impose (described below).17

Note that in this system, banks cannot create credit out of thin air, and the amount of money being created each month is known with considerable precision. The winners of the credit auction can only transfer money from their account to the borrowers’ accounts.

Conditions would attach to selling the “rights to lend” to the banks. Minimum percentages of the loans would go to small and medium-size enterprises and to new enterprises; a maximum would go to real estate lending (perhaps apportioned by location, on the basis of local changes in prices), to purchases of other existing assets, or to those engaged in speculative activities, like hedge funds. None would be allocated to socially proscribed activities, like those contributing to global warming or associated with the promotion of death, such as cigarettes. In short, there would be minimum standards for social responsibility. There would be limits on the interest rates charged. Discriminatory lending practices and other abusive practices by credit card companies would be proscribed. So, too, would connected lending. There would be further restrictions to ensure that the loan portfolio of the bank is safe and sound, and there would be strict supervision by government regulators to ensure compliance with the regulations governing any such program.

In a 21st-century banking system, a bank’s ability to lend is, in a sense, given only temporarily. It is conditional on compliance with the rules and standards established. The government would allow for entry into the banking system; indeed, separating the depository and lending functions and the open auction of rights to issue credit should make entry easier, and thus competition more vigorous than under current arrangements.

Still, since lending is an information-based activity, and the gathering of information is a fixed cost, one would like stability in the new banking system, and this will require that banks not live on the edge—that is, they be sufficiently well capitalized and sufficiently profitable. By saying “sufficiently profitable,” I do not mean the 25 percent return on equity that one of the European banks, Deutsche Bank, famously came to expect as normal. Hence, entry of enterprises with sufficient capital and who also satisfy other conditions that enhance the presumption that they would be responsible lenders, would be encouraged.18 The system of auctioning of credit would ensure that banks not earn excessive returns; most of the value of the public’s backing to the creation of money/credit would be captured by the public, rather than as now by the bankers. At the same time, the new system of credit creation ensures that the social functions of finance are more likely fulfilled, at least better than under current arrangements.

This is an example of how to create a 21st-century banking system, responding to the advantages of electronic technology, doing things that would have been far harder to accomplish in earlier decades—a banking system more likely to ensure responsible lending and macroeconomic stability than the current system, and without the huge rents and exploitation that have contributed so much to the inequality that has stalked advanced countries around the world.

But this reform is about more than curbing bankers’ exploitation. It is about enhancing macroeconomic stability. One of the major contributors to macroeconomic instability is the instability in credit supply, and, in particular, to the supply of credit for the purchase of produced goods and services. The 2008 crisis demonstrated that all the advances in markets and our understanding of markets has not led to greater stability in this crucial variable—in fact, quite the opposite. Our system not only enhances stability in this critical variable, it provides the basis of a virtuous circle leading to an increase in overall stability of the economy. One of the most important reasons that small businesses don’t repay loans is macroeconomic fluctuation: loans simply can’t be repaid when an economy is in depression. Ensuring greater macro-stability (than under the current regime) would do more than anything else to ensure the viability of the banking system.


The beauty of the modern credit system is that it doesn’t really require the same kind of capital as it did before. Recapitalizing a destroyed banking system in a eurozone country would not require gold or borrowing to buy seeds as it did in the old days. As we have seen, the government itself can simply create credit (through a government bank) or it can delegate credit creation through the auction mechanism just described.

The fact that the money created by the government can be used to pay the taxes that are owed to the government, and that the government has the power to levy taxes, ensures the value of the credit it has created. Indeed, because the credit that has been created is electronic money, the movement of which can easily be monitored, the government has not only the ability to levy taxes; it also enhances the ability to collect taxes.

The only reason for bank capital in this world is as a partial guarantee that the bank has the capacity to repay the credit—the bank’s “purchases” from the government of the right to issue credit are only temporary, and the credit thus created has to be repaid to the government. (The fact that the bank will lose its own capital has, in addition, strong incentive effects, incentivizing the bank to make good decisions about to whom to give the credit and to monitor the loan well.) But if the government is doing an adequate job of bank supervision and has imposed appropriate regulations (for example, on connected and excessively risky lending), the amount of capital required will be limited. And that fact alone should lead to more competition in the market for the provision of credit—reducing the excessive returns currently received.


The euro crisis was brought on by Greece not being able to finance its trade and government deficit—or, more particularly, not being able to roll over the debt it owed. Greece has relied massively on eurozone help, though as we have noted, the vast majority of so-called aid actually went to European creditors, not to Greece. This is itself good news for Greece (or any other of the crisis countries) about the ability to manage on its own.

With an appropriate debt restructuring (discussed later in this chapter), the country would be little the worse off, even were its “partners” not to extend a helping hand in an amicable divorce. Indeed, freed from the conditions imposed as part of the “assistance,” freed from austerity and counterproductive structural reforms, the country would actually be in better shape. At this juncture, some half decade after the onset of the euro crisis, there is even better news: Greece, the worst afflicted of the crisis countries, has virtually eliminated its trade and its (primary) fiscal deficit. If the elimination of those deficits had been the sole objective of the Troika programs, and one cared nothing about the costs of achieving these goals, then the Troika programs could be declared a success. But the goals were broader: it was to have Greece be able to stand on its own, at full employment, with growth, but, on the contrary, Greece is in a deep depression. And as this book has shown, the costs of achieving the reductions in the trade and fiscal deficits has been absolutely enormous.

Looking forward, on net, money will be flowing the other way. Money will be going not from Germany and others in Europe to Greece but from Greece to Germany and others in the Troika. This reverse flow is scheduled to go on for decades. Greece will not need help from outside—and won’t be getting any.

Outside the eurozone, Greece (or any of the other crisis countries) would be able to use the flexibility of its exchange rate (the fact that the value of the Greek-euro may be less than that of the euro) to correct any trade imbalance and to strengthen the economy. As we’ve seen, the origins of the trade deficit largely arise from the inability to adjust the exchange rate. As the exchange rate falls, exports become more attractive and imports less so, and typically (though sometimes not right away), this enables the current account deficit to be brought to manageable levels, if not to actually be eliminated. Moving to a Greek-euro would accomplish this de facto devaluation.

Greek exports some commodities like olive oil, and its mining sector is large as well. But as in any modern economy, Greece sells not only goods but services—in fact, services account for 80 percent of GDP. Greek tourism alone makes up some 7 percent of GDP.19 The effective devaluation would give Greece a competitive edge in this space, where consumers are price sensitive, and that edge would increase its foreign exchange revenues.20

Of course, over the long run, there are other things it could and should do. It could, as we’ve discussed, develop its renewable energy capacities. A devaluation would enable it to derive more Greek-euros from the sale of this energy to the rest of Europe. It also could develop itself as the Sunbelt of Europe (as Florida and Arizona have done in the United States), an attractive place for retirees (particularly if it strengthened its health care sector) and businesses, like American Express, that are electronically based and can locate essentially anywhere.

A further concern: Will those who export to Greece be willing to accept Greek-euros in payment? They almost surely would, particularly if financial markets developed to hedge against changes in the value of the Greek-euro and the ordinary euro. Of course there will be some fluctuations in the value, just as there are fluctuations in the value of the many currencies within the EU—the Swedish krona and the British pound. But modern financial markets know full well how to manage those risks.


There is another reform that would simultaneously resolve any doubts about the acceptability of the Greek-euro and help the adjustment process, an idea that has been suggested even for the United States (which has had a persistent current account deficit, contributing to the weak US economy) by none other than Warren Buffett.21 It would assure, too, the necessary flow of trade credit. In this proposal (alternatively called trade chits, or Buffett chits) government would provide to any exporter a chit, a “token” (in this case, electronically recorded), the number in proportion to the value of what was exported; to import a Greek-euro worth of goods, there would be a requirement to pay, in addition, a Greek-euro’s worth of chits or “trade tokens.” There would be a free market in chits, so the demand and supply of chits would be equal; and by equating the demand and supply of chits, one would automatically balance the current account.

In practice, the value of the chit might normally be very small. For instance, before the turmoil that hit the Greek economy beginning in early 2015, Greece had a current account surplus, in which case the value of the chit would be zero. But this system would be a way of managing the high level of volatility in market economies. With the free flow of capital, the exchange rate is determined by the vagaries of the market. And those capricious changes in exchange rate then drive exports, imports, the trade deficit, and borrowing, and in doing so, give rise to macroeconomic instability. With the system of trading chits, the trade deficit can be controlled, enhancing overall stability.22

In the analysis above, where every import needs a chit, there is either a trade surplus or trade balance. The government could use this system to limit the size of the deficit or surplus as well. For instance, if it wants to limit imports to be no more than 20 percent greater than exports, it can issue 1.2 import chits for every euro of exports. When there would be an excessive surplus, every import would be granted an “export” chit. Then every export would require a chit. This would automatically bring exports down to the level of imports. By issuing both import and export chits, the trade balance can be kept within any prespecified bounds.

The fact that the country could thus stabilize the size of the trade deficit or surplus has an enormous macroeconomic advantage: it facilitates macroeconomic stabilization itself. It means, for instance, that a small country doesn’t have to suffer from the vagaries of its “external balance,” its net export position. These fluctuations impose enormous costs on society, of which the market, in generating them, takes no account.

But deficit/surplus stability also engenders longer-term stability, for as we have seen, national indebtedness, built up over many years, can suddenly become unsustainable. The market sees the world through very myopic lenses. It is willing to lend year after year—until it suddenly changes its mind. By limiting the trade deficit, a country is in effect limiting national borrowing; this framework thus reduces a key source of instability.

The experience of Europe—and elsewhere—has shown that it is not so much government borrowing that gives rise to crises, but national borrowing. In some cases, the national borrowing was government borrowing (Greece), but in many other cases (Ireland and Spain) it was private borrowing. When a crisis hits, the debt quickly moves from the private balance sheet to the public’s.

Moreover, we can see how this system would help strengthen the Greek-euro. In the absence of the chit system, an increase in the demand by Greeks for imports (that is, for, say, German-euros to buy German cars) would lead to a fall in the price of the Greek-euro. But now, with imports discouraged by the necessity of also paying to purchase a chit, the increased demand for imports would be reflected in an increased price of a chit, rather than a decrease in the value of the Greek-euro. The Greek-euro will be stronger than it otherwise would be. The dramatic fall in the value of the Greek-euro that might have otherwise been expected in the event of a Grexit is thus avoided.23


Outside of the eurozone, Greece (or the other crisis countries) could not only manage its trade deficit without assistance, it could also manage its fiscal deficit. Higher growth would generate more tax revenues, and a debt restructuring (described below) would reduce the drain of the nation’s resources abroad. Over the longer term, prudent use of trade chits would prevent the buildup of large external debts (whether public or private).

Interestingly, today, even within the eurozone, Greece does not have a significant problem financing its fiscal deficit. The country can easily survive without the funds from the IMF and the eurozone. Greece has done such a good job of adjusting its economy that, apart from what it’s paying to service the debt, it had a surplus by 2014. The turmoil of the summer of 2015 strained finances somewhat, but by the beginning of 2016 it had returned to balance, and it is expected to have a large surplus by 2018.24

An amicable divorce would of course recognize that, nonetheless, assistance in the path towards creating an independent currency would be very helpful. There will be bumps and uncertainties in the process of leaving the eurozone. Europe should help with “adjustment assistance,” in the transition. Solidarity would suggest that the money be in the form of grants.25

Even if such assistance were not forthcoming, the transitions could be managed with relative smoothness. Money is needed by the government for three purposes: to finance the purchase of domestic goods and services, to service the debt, and to finance the purchase of foreign goods and services. The first is at least conceptually easier to address. The government can, in effect, issue credit to itself (in the manner described earlier, in our discussion of how government can issue credit to other parties). The subsequent increase in aggregate demand would be beneficial to the economy. Critics will raise a concern about inflation. But the crisis countries have been facing deflation, a deficiency of aggregate demand.

If there is a need for government finance beyond the amount that would restore the economy to full employment, then the government will have to raise taxes. The information available through the electronic payment mechanism will, however, enable it to do a much better job of collecting the taxes already on the books, making the necessity of raising tax rates even less likely.

The need for funds for servicing the debt will be greatly reduced through debt restructuring, which should be an important part of any amicable divorce. This is discussed in the next section. The need for foreign exchange can also be easily addressed, if the other parts of the program (including the use of Buffett chits) are adopted. For then there will be no real “shortage” of foreign exchange.26


Most of the crisis countries have a large debt, denominated in euros. As I discussed in the last chapter, in some cases such as Greece, it is already apparent that that debt has to be restructured. But that will be all the more so after the country leaves the eurozone. For it is likely that the currency (for simplicity, we will continue calling it the Greek-euro, rather than the drachma) will be worth less than the ordinary euro, which we will still refer to as just the euro.

I explained in chapter 7 that debt restructurings (bankruptcy) are a central feature of modern capitalism. Still, they are often contentious.

The Greek government could do a few things to smooth the process. First, the government should declare all euro-denominated debts payable in Greek-euros. Such redenominations have happened before. When the United States left the gold standard, debts denominated in gold were redenominated into dollars. Indeed, upon entry into the eurozone, debts that had been denominated in drachmas got converted into euros.27

If the Greek-euros trade at a discount relative to the ordinary euro, it would be tantamount to a debt restructuring, but one done smoothly, without recourse to the complexity involved in ordinary debt restructurings. Interestingly, the system of chits described earlier would reduce the extent of the decline in the exchange rate.28

In a few cases—Greece is one—there will have to be explicit debt write-offs. So, too, if there are debts owed under contracts issued under foreign laws, in which case the crisis country cannot simply redenominate. (With a truly amicable divorce, other EU countries should agree that debt issued under other EU jurisdictions could be redenominated.)

In the case of private debts, the government should pass a law providing for expedited restructuring.29 The United States has recognized the importance of giving corporations a fresh start, and doing so quickly, in Chapter 11 of its bankruptcy code. When many companies are facing default—as may well be the case if their euro-denominated debt is not redenominated—this is all the more important. As we noted in the previous chapter, the crisis countries in Europe need to adopt some variant of this idea—and this is true whether they do or do not leave the eurozone.

This chapter is focused on an amicable divorce, and with most of Greece’s debts owed to its European partners, one hopes that they would understand the importance of giving a fresh start, the importance and necessity of a deep debt write-off, and rather than confronting the country with a barrage of lawsuits, would use their own powers and influence to limit the scope for such suits from private creditors. With a backdrop of European solidarity, they could proceed with a debt restructuring that went well beyond the minimal set of principles adopted by the international community in 2015, enabling the debt restructuring process to be even smoother and more successful.30


The previous discussion described a number of institutional reforms and innovations that would lay the groundwork for a smooth transition of any one of the crisis countries out of the eurozone. Our analysis suggests, too, that simply having Greece leave will not resolve the problems of the eurozone, either now or over the long run. There are other countries in depression and recession, from which they will not emerge anytime soon. Rather than having each of the crisis countries leave, one by one, or the countries of the eurozone stick together, mired in an ill-fated near-stagnation, there is an alternative solution: Germany and perhaps some of the other northern European countries (say, Netherlands and Finland, should the country soon recover from its current problems) could leave. This would be an easier way to bring Europe back to health.31

The departure of some of the northern countries would allow an adjustment of the exchange rate of the remainder relative to that of the northern countries. That adjustment would help restore current account balance—without having to resort to recessions or stagnation to suppress imports. The lower exchange rate would increase exports and reduce imports, which would stimulate growth. The increased growth would provide more revenue to the government, bringing an end to austerity. The downward vicious circle that has been part of Europe since the onset of the crisis would be replaced by a virtuous circle of growth and prosperity.

The increased strength of the economies in southern Europe would enable them to service their debts, and even pay down some of the debt. With the departure of the northern countries, the currency in use by the southern countries would still be the euro (that of the northern countries we will refer to as the northern-euro). Because debts are owed in euros, and the countries in the south had retained the euro, there would not be an increase in leverage, as there would be if the southern countries left the eurozone—with all the adverse effects attendant to the increase in leverage.

Meanwhile, in northern Europe, the stronger northern-euro would work wonders to eliminate the persistent trade surplus, which has been problematic not only for their partners in the eurozone but for the global economy. Germany would then be forced to find other ways of stimulating its economy—doing some of the things suggested in the previous chapter, like increasing wages at the bottom, reducing inequality, and increasing government spending. In the current environment, monetary policy (even that of the northern countries) would be relatively ineffective, and so if Germany wishes to maintain full employment, it would have to rely on fiscal policy.

With firms, households, and even governments in the north owing money in euros, and the value of the northern-euro appreciating relative to the euro, there would be an automatic deleveraging of the economy, which would stimulate growth. This would partially offset the contractionary effects of the elimination of the trade surplus.


This chapter has described how one can manage an amicable divorce. We have shown how each of the central problems facing the crisis countries could be addressed in such a separation. Current account deficits could be eliminated or even turned into surpluses. Governments would be able to finance their expenditures. The economies could be returned to full employment—after years mired in recession and depression—with neither inflation nor deflation. I have described a system that would enable even the traditional “weak” economies from building up the foreign debts that have repeatedly precipitated crises. Even within this framework, there will be decisions to be made: at least in the early years of transition, I would suggest that they aim for a current account surplus, tilt public spending toward investment, run a small fiscal surplus, and, if necessary, use the balanced-budget multiplier to ensure aggregate demand.

Of course, matters seldom go so smoothly. As always, there are likely to be hurt feelings, some finger pointing: Who’s to blame? Would the marriage have gone differently if only … ? If only Greece had behaved better? If only the Troika had not been so abusive? The Greeks will almost surely exhibit aspects of a person in an abusive relationship (sometimes referred to as the battered woman syndrome)—they will say, if only we had been more accommodating … If only we had …

The previous chapters have said, however, that what is at fault was the structure of the eurozone itself. I explained how it is unlikely that the outcome would have been much different if Greece’s negotiators had been more accommodating—over the course of the crisis, Greece has had negotiators with a panoply of styles, and none have fared well. There really is no need for self-recrimination.

MANY WITHIN EUROPE will be saddened by the death of the euro. This is not the end of the world: currencies come and go. The euro is just a 17-year-old experiment, poorly designed and engineered not to work. There is so much more to the European project, the vision of an integrated Europe, than a monetary arrangement. The currency was supposed to promote solidarity, to further integration and prosperity. It has done none of these: as constructed, it has become an impediment to the achievement of each of these goals, and if the reforms to the eurozone discussed in the last chapter are beyond the reach of the eurozone today, it is better to abandon the euro to save Europe and the European project.