2:44pm

Thu November 10, 2011
Planet Money

Leaving The Euro Is Hard To Do

Originally published on Thu November 10, 2011 7:32 pm

"I don't want the euro to fall apart," says Simon Wolfson.

Lots of people don't want the euro to fall apart. But Wolfson feels compelled to say so because he's offering a $400,000 prize for figuring out how to dismantle the euro.

Wolfson — aka Lord Wolfson of Aspley Guise — is the CEO of a big retailer called NEXT. He has argued against the UK joining the euro, but his company has stores all around the euro zone.

"This is a life boat in case the euro breaks up," he says. "No ship ever sunk for having too many life boats, and at the moment, the euro has no life boats at all. There is no contingency plan."

You might think leaving the euro would be easy. Greece, for instance, could just reverse everything it did when it joined. Replace the euros inside its borders with new Greek money. Bring back the drachma.

It turns out to be very difficult. There's a famous historical example here. Ok, it's not that famous. But it's worth looking at: The break-up of the Austro-Hungarian currency union in 1918.

Just as the countries of Europe today share the euro, the Austrian empire and the Kingdom of Hungary had created a shared currency: the Austro-Hungarian crown.

After World War I, the region broke up. All of a sudden there were lots of countries wanting to switch to their own currencies.

At the beginning, they used a simple system: Countries simply stamped existing Austro-Hungarian currency with particular markings to turn it into new, domestic currency. Some countries used ornate samps; Romania's stamp was just a cross.

This quickly led to chaos. Everyone wanted to get their money stamped in the country they thought would have the strongest currency. Countries sealed their borders, but it was no use.

"You had boxcar loads of currency" moving across borders, says Michael Spencer, an economist who has written about this period.

Imagine what would happen now, when people can move money with the click of a mouse. If some official in Greece even breathes a word about maybe, possibly, theoretically considering leaving the euro, money could fly out of the country before anyone had time to even think about sealing the borders.

"In principle if you could spring by this surprise on everybody, it can be done," Spencer says. "It is much more likely that people see this coming and then you could have the entire deposit base of your banking system flee over night.

In other words, there's a sudden, nationwide bank run.

Spencer says after the breakup in 1918, it was unclear for a while what the new currencies were even worth. Countries sometimes resorted to bartering. It took years for things to stabilize.

As a result, Michael Spencer doesn't have easy answer for Baron Wolfson's contest about how the euro might be dismantled. His advice to Greece and the other countries? Find a way to stick it out.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, HOST:

The new Greek prime minister says he wants Greece to stay in the eurozone, but many leaders in Europe are, nevertheless, wondering is it possible for a country to safely leave the euro and reestablish its own currency? Well, one mane is offering a $400,000 prize to anyone with a good answer. David Kestenbaum of our Planet Money team has that story.

DAVID KESTENBAUM, BYLINE: The man offering the prize is Simon Wolfson, full title, Baron Wolfson of Aspley Guise. He's putting up the prize money himself.

SIMON WOLFSON: It is a very serious prize. In fact, it's the second biggest economic prize after the Nobel Prize.

KESTENBAUM: What would we have to do to win your prize?

WOLFSON: Basically, you've got to come up with a way that the euro could be dismantled.

KESTENBAUM: Dismantled safely. Wolfson was never a big fan of the euro, but he is CEO of a big British retailer called NEXT, which has stores all over Europe, four in Greece.

WOLFSON: I don't want the euro to fall apart. This is a life boat in case the euro breaks up. And, you know, no ship ever sunk for having too many life boats. And at the moment, the euro has no life boats at all. There is no contingency plan.

KESTENBAUM: You might think leaving the euro would be easy. Greece, for instance, could just reverse everything it did when it joined. Replace the euros inside its borders with new Greek money. Bring back the drachma. It turns out to be very difficult. There's a famous historical example here. Well, it's famous for some people - the break-up of the Austro-Hungarian currency union in 1918.

Just as the countries of Europe today share the euro, the Austrian empire and the Kingdom of Hungary had created a shared currency, the Austro-Hungarian crown. After World War I, the region broke up. And all of a sudden, there were lots of countries wanting to switch to their own currencies. Economist Michael Spencer has written about this. He says Yugoslavia was the first to split off and instead of printing a new currency, it announced what seemed like a cleaver plan.

MICHAEL SPENCER: Starting next week, bring all your currency to the post office or wherever and we're going to stamp it.

KESTENBAUM: Stamp it?

SPENCER: Literally stamp it with an ink stamp. You walked into the post office and they stamped the name of the country. In the Czech Republic they had a fairly ornate stamp. In Romania, they simply had a cross.

KESTENBAUM: I know it looks the same and there's - someone's drawn something on it, but don't worry, it's new money now.

SPENCER: Correct.

KESTENBAUM: Soon, though, there was chaos. Everyone wanted to get their money stamped in the country they thought would have the strongest currency. Countries sealed their borders, but it was no use.

SPENCER: You're talking about border crossings at roads in very rural underdeveloped areas. So it was very easy if you really want to go to the trouble of getting your money out of the country.

KESTENBAUM: Do you imagine in your head at the time there were people on horseback with satchels filled with money sneaking it across the border?

SPENCER: There have to have been. You had boxcar loads of currency. These were not small amounts of money that people were moving across borders.

KESTENBAUM: Imagine what would happen now, where instead of transferring money on horseback, we can do it with the click of a mouse. If some official in Greece even breathes a word about maybe, possibly, theoretically considering leaving the euro, money could fly out of the country before anyone had time to even think about sealing the borders.

SPENCER: In principle, if you could spring by this surprise on everybody, it can be done. It is much more likely that people see this coming and then you could have the entire deposit base of your banking system flee over night.

KESTENBAUM: Entire deposit base of your banking system flee overnight. What one economist called the mother of all bank runs. Spencer says after the breakup in 1918, for a while, it was unclear what the new currencies were even worth. Countries sometimes resorted to bartering, trading one good for another without using money. It took years for things to stabilize. As a result, Michael Spencer does not have easy answer for Baron Wolfson's contest about how the euro might be dismantled.

His advice to Greece and the other countries? Find a way to stick it out. David Kestenbaum, NPR News. Transcript provided by NPR, Copyright National Public Radio.