Today Bootle is betting his professional reputation on another bold contrarian call, one with long-term ramifications for the world economy and global stock markets: He strongly believes that at least a partial breakup of the eurozone is inevitable and that massive changes are coming for the euro, the currency now shared by 17 nations accounting for one-eighth of world GDP.
In July, Bootle and his team won the prestigious Wolfson Economics Prize for providing the best answer to the following question: "If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed?" In a 114-page report, "Leaving the Euro: A Practical Guide," Bootle delivered a blueprint for the steps a nation should take in exiting the common currency. He also went further, summoning a powerful argument for why an exodus of weak countries is the only solution for Europe's deep malaise.
Bootle is not shy about championing his highly unpopular view. "The euro is a depression-making machine," he tells Fortune. "The politicians keep throwing money to support the weaker nations' debt problem. They never talk about restoring growth. Far from a disaster, a breakup of the euro is the only way to bring back growth and get Europe out of this mess. It can't happen soon enough."
Policymakers continue to take a diametrically opposite approach. Almost without exception, Europe's political leaders and regulators strongly back the euro's survival and generally claim that a breakup would bring economic Armageddon. Optimism that the eurozone will hold rose on Sept. 6, when Mario Draghi, chief of the European Central Bank, announced a giant program for purchasing the sovereign debt of weak eurozone nations. Draghi further stated that "the euro is irreversible." Then, on Sept. 12, a German court approved the country's participation in the European Stability Mechanism, a rescue fund with a lending capacity of $645 billion. Over five trading sessions, the S&P 500 jumped 2.4% in a potent relief rally.
But the continued bailouts are just buying time. Even economists who dread a euro breakup admit that it will probably happen eventually unless Germany and other healthy nations provide far greater support to their weak neighbors. "Europe needs to create federal-style debt shared by all the eurozone members," says Greek economist Yanis Varoufakis. "If that doesn't happen, the eurozone will probably dissolve."
The bet here is that Bootle is right and that the euro will fracture in the next few years. The result will be extremely messy in the immediate aftermath, bringing severe hardship to the exiting countries -- a rash of bankruptcies, giant defaults on sovereign debt, and temporary panic in world stock markets. But the pain that a breakup compresses into a one-time shock will happen anyway if weak nations remain in the euro. It will simply stretch over a number of years and turn out far worse. As Bootle argues, Europe must choose growth, and a split in the euro will bring it back with surprising speed. Let's use his report as a guide for how a successful breakup could play out. (...)
Here's how the mechanics might work if, say, Spain decided to withdraw. The government would announce the decision on a Friday, shortly after the Prime Minister and cabinet reached the decision. It would state that by 12:01 a.m. Monday all wages, bank deposits, pensions, and prices would be reset in pesetas at a 1-to-1 ratio with the euro. Over the weekend, all ATMs and bank branches would be closed and no electronic transfers allowed, to prevent citizens from moving money to, say, Switzerland before the conversion. Bootle recommends that departing nations start printing notes and coins only after the announcement. In the interim all transactions would be via credit or prepaid cash cards. Euros would also be accepted for cash purposes for a fixed period. Starting on Monday morning, the euro would make its debut as a foreign currency. Its value would rise sharply against the new peseta. So a taxi fare priced at two pesetas might go for just one euro within days.
How about the debt issue? Bootle advises nations to re-denominate all sovereign bonds in local currency. The re-denomination really amounts to a default, since the foreign creditors would take big losses. Bootle advocates going further. He wants exiting nations to immediately cease all interest payments and demand a write-down bringing debt to a manageable 60% of GDP. Between the devaluation and the write-down, most creditors would lose 70% of the face value of the bonds. Bootle's argument is that their original value is a pure fiction anyway and a default of that magnitude is inevitable.
