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Could Greece have 2 Currencies?

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Could Greece have 2 Currencies? Empty Could Greece have 2 Currencies?

Post by Ponee Mon Aug 24, 2015 12:35 pm

Grexit is on everyone’s lips this summer. Although the Eurozone has recently approved a €86bn Greek bailout and the possibility of a debt relief seems to be more concrete, the situation is far from being resolved.

 “I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own.”[url=http://twitter.com/intent/tweet?url=http://themarketmogul.com/could-greece-have-two-currencies/&text=%C2%A0%E2%80%9CI remain firmly of the view that Greece%E2%80%99s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own.%e2%80%9d&via=&related=the_marketmogul&hashtags=Drachma,Eurozone,greece,Grexit,IMF,loan,markets,Syriza,Tsipras,] tweet[/url]
Christine Lagarde, Managing Director, IMF

The national currency

With the notion of default finally abandoned, a return to the national currency, the drachma, is very attractive among some economists and Greek politicians. There are factions belonging to both coalition parties that are proponents of this view. The return to an own currency would mean somehow to cancel the debt, with the full freedom to print paper money and hence, to overcome the problem of shortage of liquidity. The consequences of a pure return, however, could be devastating.

First of all, there would be a rapid devaluation of the drachma with a consequent hike in prices and inflation. The Greek citizens would have their real wages and their purchasing power dramatically reduced. Then, there would be a flight of capital, a drop in imports and an increase in private debt, as the lending and deposit rates would rise. Finally, the (nominal) debt would not cease, but due to the devaluation of the drachma, it would increase again, forcing the government to print paper money in an unrestrained manner.

The dual system

Among the various proposals, a possible maintenance of both currencies stands out. In other words, a dual currency system that will allow Greece to maintain a position in Europe without giving up its monetary authority. The plan consists in the use of a domestic currency, parallel to the euro, with the aim of introducing more liquidity in the economy. This solution would recapitalise banks and lending institutions before that serious economic and social disasters could break out. Some believe that this is only a Band-Aid, and not a definitive solution, since an alternative currency cannot be the answer to a so insurmountable debt.

However, the national currency would be use for domestic transactions, pensions and salaries to the public sector employees. The euro would continue to serve its role as an official external currency, used for instance in the tourists sector, and all debts in euros incurred would continue to be respected. Therefore, the main purpose is to use a domestic currency to revitalise and foster production and employment in order to allow Greece to be in the position to pay its creditors.

Without money, the economy cannot restart and since investors (with good reasons) no longer intend to invest capital in Greece, the introduction of its own coinage seems to be a good solution.The new drachma should fluctuate within certain ranges with euro in order to restore competitiveness in the Greek markets. It is obviously a long process that cannot take the short time required by Germany and other institutions, as all the precautionary manoeuvres must be implemented.

How much time?

The dual system, as mentioned above, would be efficient only in the medium and long run. The short-term impact could be even negative. The devaluation of the new drachma would cause damage to companies and banks, as their assets previously purchased in euros would be devalued, while their liabilities would remain in the strong currency. The Greek financial system would be even more weakened by continual withdrawals, even if it could be solved with adequate capital controls. The implementation of a parallel currency takes time and cannot be done overnight. In addition, the proposal requires the full approval of the Greek citizens, who have to trust the new monetary system.

All this needs a political and social stability in the country, but given the recent resignation of Alexis Tsipras and the convocation of new elections on 20 September, it seems far from happening. Following the right considerations, it would be possible to use the two currencies simultaneously, without any opposition. Therefore, it’s not an aut-aut, but a vel-vel, derived from Latin. This ancient locution, however disjunctive, expresses the idea that both euro and drachma can coexist, each one with a different purpose



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