How the Eurozone should've been set up.

[tpfkaw]

There has been a lot of talk about how the Eurozone presented a moral hazard, in which countries like the PIIGS could deficit spend and borrow cheaply with Euro-denominated bonds, taking advantage of the fiscal rectitude of other Euro members (specifically Germany), then expecting to be bailed out once their profligate ways caught up with them.

It seems to me that this was entirely predictable, and could've been entirely prevented merely by setting up the Eurozone in a more sensible way.  Here's how I would have done it:

1. The Euro would've been pegged at 1 Euro = 1 Deutschmark, as in real life.

2. The paper versions of other currencies (Francs, Drachmas, Liras) would be phased out, but they would remain at their pre-Euro values as virtual electronic currencies used only by their country's respective central banks.

3. Euros would then have to be purchased by national central banks from the European Central Bank using "virtual Francs," "virtual Drachmas" etc.  (And, yes, virtual Deutschmarks too).

In this way a single currency could be implemented without compromising national sovereignty, and each country could have its own monetary and fiscal policies, but without any moral hazard as they would have to face the real-world consequences of inflationary policies.

[tpfkaw]

They would be central bank-only currencies like IMF Special Drawing Rights, and could only be bought and sold by central banks or national governments.  I suppose it wouldn't really be defeating the purpose if they were used by commercial banks or even traded in the market either.

That's not really a far out-there suggestion.

[tpfkaw]

How would you prevent a country like Greece from creating an endless amount of "virtual Drachmas" and using it to 'purchase' euros from the European Central Bank?

For the same reason they couldn't create an endless amount of real Drachmas prior to entering the Eurozone.

[tpfkaw]

How would you prevent a country like Greece from creating an endless amount of "virtual Drachmas" and using it to 'purchase' euros from the European Central Bank?

For the same reason they couldn't create an endless amount of real Drachmas prior to entering the Eurozone.

What reason is that?

Because they would become worthless, obviously.

[tpfkaw]

How would you prevent a country like Greece from creating an endless amount of "virtual Drachmas" and using it to 'purchase' euros from the European Central Bank?

For the same reason they couldn't create an endless amount of real Drachmas prior to entering the Eurozone.

What reason is that?

Because they would become worthless, obviously.

Not really. Prior to entering the Eurozone, if they kept on creating Drachmas, the Drachma would lose its value quickly, but its value would never fall to zero. Even Zimbabwe's currency never fell to zero; it only fell to a very, very small amount approaching zero. The cost that this imposed on society was through inflation.

But now you're talking about a currency that is not traded on the market. If I understand correctly, it would only be traded between the Bank of Greece and the European Central Bank, two government actors, who could then set the price at whatever level they wished. Thus, the Bank of Greece could still print endless Drachmas, and use it to buy Euros, so long as the European Central Bank allowed any exchange rate.

Well yes, I meant "worthless" as a figure of speech, obviously.  And the ECB would presumably not be willing to sell Euros at any exchange rate, though your point that it would be too open to manipulation is fair; I'll probably amend my original proposal to allow them to be forex traded.  (I came up with this at like 1 AM, so I can be forgiven for not having thought everything through that well).

[tpfkaw]

How the Eurozone should have been set up: Common market without monetary union, not to mention a lot of the regulations (Don't even get me started on CAP, which is the cause of the largest amount of wasted food in the history of mankind).

Well yes, I agree.  I'm just saying that if they had to have a multinational currency, they should've set it up differently.  It's funny that certain types are always insisting that having common markets must always come with surrender of sovereignty, whether it be "unions" as in the EU or simply international "commissions" that for some reason have the power to legislate in their "oversight" of trade (as in NAFTA).