As each day passes, and I watch and read about events in Europe, I grow increasingly frustrated. The Eurozone as it exists today is doomed, and if it isn’t soon dismantled, it risks derailing the worldwide now underway. Watching the Greek parliament pass an austerity bill for me was analogous to watching the Soviet Parliament pass a new civil rights law. It won’t work.

If you look at the latest three quarters, you already see that the US current account deficit has started to grow, which is a drag on US growth. The collapsing euro, along with a number of other major currencies is now almost certainly going to slow US growth further.

The peripheral countries of the Eurozone need to exit ASAP. It should be done this weekend. Their debts in euros should be redenominated back into local currencies at one-to-one. This wouldn’t represent a default, since when these debts were all redenominated into euros when the fiasco plan started, no one called it a default – even when German bunds were redenominated into euros. A redenomination, as long as it is done at one-to-one, is merely an exchange rate adjustment.

Exchange rate changes have never been included in the list of things included in default risk.

The fact that Britain, a non-euro member, doesn’t have a stable majority in Parliament, puts worldwide growth at even higher risk. Are we about to repeat 1937?

The US, France, Germany, and China should demand that the peripheral countries leave the failed monetary union. Also, the IMF should stay out of the entire affair. It has nothing but a horrible history of making matters worse. Austerity is not what these countries need. What they need are more flexible prices, something that only a flexible exchange rate can provide. The difficulty we have here is that France, Germany and the Benelux will reap the rewards, while the periphery will go down the tubes in the name of austerity.

Also, if the peripheral countries have problems rolling over their local currency debt post-redenomination, they should simply ignore Maastricht and stop issuing short-term paper to their banks, but require their banks to hold reserves made up only of medium-term government paper with capitalized interest. Greece did this about 20 years ago. Almost no one outside the Greek banks even noticed. If such an arrangement occurs within a national banking system, once again, it is not a default, and since the local debt is issued under local law, and central banks can regulate their own banks as they wish, local courts can decide the issue and will likely side with the government. Pan-European courts can then spend the next few years debating its euro legality. By then the new system will have been working well for years.

Tempus fugit!

Tags: China, default, eurozone, France, Germany, greece, redenomination, US