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1、 A Parallel Currency Proposal for the Stronger Euro- States CAWM Discussion Paper No. 64 August 2013 by Ulrich van Suntum Abstract It is argued that the stronger member states of the European Monetary Union should find their way out of the Euro in order to avoid being dragged into a disastrous cours
2、e of inflation and over- indebtedness by the weaker members. A sudden exit would presumably cause financial turmoil as well as political damage and is, thus, no realistic option. However, by creating a parallel currency called “Hard-Euro” as an intermediate solution, there would indeed be a way of s
3、eparating the EMU into two parts, with a weaker Euro in the southern countries and a stronger Euro in the northern countries. Using a small macro-model, the paper discusses this idea and its economic consequences in more detail. Following the early idea of separating the functions of money by Eisler
4、 (1932), the Hard-Euro is invented in the form of a pure book-money, while the Euro is still the only cash money until further notice. The Hard-Euro is designed as an index-currency such that its exchange rate exactly compensates for the inflation rate of the common Euro. Hence, it is absolutely sta
5、ble in terms of consumer prices, and at the same time the exchange rate can never overshoot. By this means, savers in the stronger member states are protected from both inflation and financial repression, while the weaker member states can improve their competitiveness by inflating the Euro. It is s
6、hown, that this approach is likely to increase both investment and total output in the EMU. Later on, this intermediate regime could be substituted by the definite separation of the Euro-Zone into a stronger northern and a weaker southern part. 1. Introduction Less than 15 years after the Euro has b
7、een invented as the only cash currency in originally eleven (and meanwhile 17) European countries, the European currency union has come into serious trouble. Not only all rules which had been agreed on (including the non-bailout clause, the prohibition of monetizing public debt, the debt limits of t
8、he Maastricht treaty and the independence of the European Central Bank) have meanwhile been virtually abandoned, but there is also a severe debt crisis along with hard burdens on both the weaker and the stronger member states. While the former suffer from deep recessions coming along with their stru
9、ggle on more fiscal soundness, the latter saw themselves forced to commit on huge guaranties and also direct payments in favor of those member states who had formerly misused the currency union to live beyond their means. Even worse, the mal-incentives and insufficient sanctions for misbehavior whic
10、h had led to this dilemma are still unsolved, in spite of the so-called fiscal pact and other institutions which have newly been established. Hence, although some progress is currently observably concerning current account balances and interest spreads, there is little hope that things will go bette
11、r in future. On the contrary, there are now even stronger incentives in favor of excessive debt taking and living on the cost of other countries than before: The extremely expansionary monetary policy of the ECB greatly facilitates the Euro-states to bear their debt burden, but at the same time effe
12、ctively expropriates private savers by the way of financial repression. Because private savings are more and public debt is less in the solid than in the weak countries, the ECB-policy implies a huge redistribution at the cost of the former, which is currently calculated at 14 Billion for German sav
13、ers alone. The same applies to the purchase of government bonds by the ECB, which is equally asymmetric. Hence, in contrast to similar programs of the FED or the Bank of Japan, monetizing public debt is much more problematic in a currency union. This is the more the case as the so-called Target bala
14、nces, which reflect another redistribution means in favor of the weaker countries, need not be balanced in hard currency in the EMU, other than in the US Fed-system. So there is no incentive to avoid excessive current account deficits, because these can conveniently be financed by the Target balance
15、s, i.e. by printing fresh money at the expense of the other EMU-members. With the OMT-program, the ECB has now officially committed itself to buy unlimited amounts of distressed government bonds if necessary. Although this promise is formally dependent on obeying the ESM-reform requirements, this bi
16、nding is not at all believable. Nobody can really imagine that the ECB would drop e.g. Italy only because they declare themselves unable to follow such requirements. Not only would this contradict all experience with the previous so- called Euro-rescue policy (eg. concerning Greece), but it would also mean the ECB to invert their present standard argument that the fallacy of one member of the currency union would inevitably cause e
