Roger Bootle wins £250k Wolfson prize for guide to euro break-up

Roger Bootle wins £250k Wolfson prize for guide to euro break-up

By Tanya Jefferies

PUBLISHED: 09:56 EST, 5 July 2012 | UPDATED: 10:41 EST, 5 July 2012

The £250,000 Wolfson challenge to find the least damaging way for countries to abandon the euro has been won by economist Roger Bootle and his research firm Capital Economics.

The victorious entry, titled 'Leaving the euro: A Practical Guide', focuses on the best way for a weak member like Greece to manage an orderly exit from the single currency.

It concludes that although the departure of one or more eurozone members would create winners and losers, the overall outcome would be positive for the growth and prosperity of the rest - and the wider world economy.

Prize winner: Roger Bootle came up with the best way to break up the euro

Bootle and his team beat competition from more than 400 initial entrants to take the Wolfson Economics Prize, which was set up by Next boss Lord Wolfson and is the second-largest award to an economist after the Nobel Prize.

All tried to answer the following 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?'

BOOTLE'S GUIDE TO LEAVING THE EURO

• A new currency is introduced at parity with the Euro on Day 1 of an exit. All wages, prices, loans and deposits are redenominated 1 for 1. Euro notes and coins would remain in use for small transactions for up to six months.

• The exiting country would immediately announce a regime of inflation targeting, adopt a set of tough fiscal rules, monitored by a body of independent experts, outlaw wage indexation, and announce the issue of inflation-linked government bonds.

•  The government should redenominate its debt in the new national currency and make clear its intention to renegotiate the terms of this debt. This is likely to involve substantial default â€" perhaps sufficient to reduce the ratio of debt to GDP to 60 per cent.

•  Key officials from the exiting country meet in secret one month before publicly announcing a day of exit or ‘D Day’.
  

• Eurozone partners and other international monetary organisations would be notified of D Day three days before â€" preferably on a Friday â€" when a public announcement is made that the changeover to the new currency will take place at the start of the following week.
  

• Immediately after this announcement, domestic banks and financial markets should be closed to prevent capital flight.

• The government of the exiting country and the institutions of the EU should seek to minimise uncertainty over the legal issues, for example by providing guidance on the validity of redenomination, the status of the exiting country with the EU, and the continuity of the euro itself.

The other shortlisted finalists were Jens Nordvig and Nick Firoozye of Nomura Securities, private investor Cathy Dobbs, Neil Record of Record Currency Management and Jonathan Tepper of Variant Perception.

In the first round, the judges also gave a special mention to the entry from the youngest competitor, Jurre Hermans, an 11-year old schoolboy from the Netherlands who believes Greece should leave the euro. Jurre received a €100 gift voucher.

But the judges eventually came to unanimous agreement that Capital Economics’ submission was the most credible solution to managing an orderly exit from the eurozone by one or more members.

Bootle, managing director of Capital Economics which he founded in 1999, said: 'I am absolutely delighted to win the Wolfson Prize. It has been a team effort and I would like to pay tribute to my colleagues at Capital Economics who collaborated with me.

'Our suggested exit path from the euro involves the overnight introduction of a national currency, with monetary amounts converted at 1 for 1, while the currency is allowed to fall well below this on the exchanges.

'Until new notes become available, non-cash means of payment and euro cash are used.

'People may disagree on whether leaving the euro is a good thing, but the contribution of the Wolfson Prize has been to demonstrate that it can be done.'

See a video of Bootle discussing his winning entry below.

Derek Scott, chairman of the judges, said: 'The present configuration of EMU is unsustainable but the politicians are in denial and their time would be better spent reading Roger Bootle's paper than devising new "solutions" to the eurozone crisis that cannot and will not work.'

Lord Wolfson said: 'The prize was offered in the unshakable belief that the more thought and preparation that goes into a break-up, the less damaging a collapse would be.

'Yet the break-up of the euro looks ever more likely. The multiple attempts to stabilise the euro appear to do little more than refinance the unsustainable borrowings of the euro’s weaker members.

'Nothing has been done to address structural problems of these stricken economies - overvaluation, uncompetiveness and hyper unemployment.

'I hope that the entries of our finalists, and in particular the clear, well thought through work of our very worthy winner, Roger Bootle , will be of help in the coming months to policy makers.'

Victory: Lord Wolfson, front right, presents the award to Roger Bootle, front centre, and the winning team from Capital Economics

WHAT DID THE OTHER FINALISTS PROPOSE?

Catherine Dobbs, a private investor, proposes that the euro disappears and all holders of euros have their euro claims replaced by claims on the new currencies according to a set proportion.

The key objective is to disincentivise capital flight - and hence bank runs and financial and social crisis - while being fair to all holders of euros.

Jens Nordvig and Nick Firoozye of Nomura Securities argue that the treatment of foreign law debt contracts is important because there are around €10trillion outstanding.

They propose that debt contracts falling under national/local law should be redenominated into a new currency. Debt contracts falling under foreign law should be redenominated into a second European Currency Unit (ECU).

Neil Record of Record Currency Management says that if any country leaves the euro, the entire euro must be dissolved.

He believes that the moment one country leaves the euro, the view that the euro is ‘permanent’ becomes untenable, giving markets the ammunition to undermine structural weaknesses elsewhere. His entry's focus is administrative, emphasising secrecy for as long as possible and setting out a detailed week-by-week timetable.

Jonathan Tepper of Variant Perception contends that currency exits and devaluations are often predicted to lead to 'Armageddon' but rarely do.

His entry argues that the real issues are not created by the exit process per se, but by the needs that motivate the exit â€" the need for eurozone periphery countries to default and devalue.

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