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Greece’s new government has been pondering how and when to default on the
mountain of debt it has inherited, which now exceeds 175% of GDP. For some
reason, this supposedly entails “leaving the eurozone,” and possibly
introducing a new, independent floating currency, perhaps reviving the name
“drachma.”
But is this necessary? It is not necessary at all. A “default” just means not
paying some money back. This does not require a government to issue a new currency,
just as a homeowner who defaults on a mortgage obligation is not required to
issue a new currency. You “just walk away,” which is perhaps even easier on
the sovereign level, since the debt is not collateralized.
But let’s assume that, in a fit of pique, the European Central Bank and other
monetary institutions do decide to exclude Greek institutions from the
official eurozone system, and in one way or another “kick Greece out of the
eurozone,” whatever that means in practical terms.
What then? Greece could continue to use the euro. It would join ten other
small states and territories that use euros exclusively, without being part
of the eurozone. These include Andorra, Monaco, and Montenegro. At least ten
countries have a similar policy, but use the dollar instead, including Panama
and Ecuador, which dollarized in 2000. Ecuador’s government defaulted on its
sovereign debt in 2008, but continued to use the dollar afterwards. So, we
see that debt default, and the choice of currency in use, don’t really have
much to do with each other at all.
Five countries use New Zealand dollars exclusively; three use Australian
dollars; and one (Lesotho) uses South African rands exclusively.
Liechtenstein uses Swiss francs.
Greece is far larger than these tiny states, so although such an outcome is
technically possible, it might be a bit uncomfortable politically. Greece’s
government might then consider an “open currency policy,” whereby any Greek
entity may use the currency of their choice. The government does not officially
endorse any single currency, and there is no domestic currency. We might
imagine that euros would continue to be the primary currency in use, but
perhaps Turkish lira, Chinese yuan, and U.S. dollars could find wide
adoption.
This solution is similar to that adopted by Zimbabwe, which has no domestic
currency and an official “multi-currency” policy. The U.S. dollar is people’s
primary choice, but euros and South African rands are also popular. This is
despite the fact that Zimbabwe’s government is very unpopular with the U.S.
State Department.
Actually, this outcome is not so much different than the situation in Greece
before the adoption of the euro, when German marks were often in use.
Corporations and indeed the government itself issued debt denominated in
marks.
Another option for Greece would be to introduce a domestic currency, but link
it to the euro via a currency board system. This arrangement is already in
use by several states that are not eurozone members, including Bulgaria,
Bosnia, Denmark and at least fourteen countries in Africa. It was also in use
by Estonia and Lithuania, before those countries entered the eurozone.
Greece’s government could, of course, introduce its own floating fiat
currency, and mandate its use domestically although I suspect the government
itself would end up issuing debt in foreign currencies before too long. A
number of economists have been promoting this idea, apparently for the
primary purpose of devaluing the currency by a large amount immediately thereafter.
Greeks themselves know a little about this: between 1981 and 2000, when the
euro was introduced in Greece, the drachma fell to one-eighth
of its initial value against the U.S. dollar. This was so successful that
Greeks trashcanned their old junk currency and embraced the euro.
The
world is full of junk currencies, and Greeks know exactly what results
they produce. If the government is going to introduce a new currency on the
world stage, it should have at least a hope of being better than the euro,
yuan, dollar, or other options.
I suggest a new drachma linked
to gold. The government would have a “multi-currency” policy, where
people could use any currency they wish in commerce and as a basis for
contracts, including euros, dollars, or Russian rubles. Among those options,
would be the option of a gold-based currency. Nobody needs to use it. They
could use euros or dollars instead. But, they could use it if they wanted to.
It might become popular, just as gold-based ETFs have become popular
worldwide as an investment vehicle. Zimbabwe’s government recently floated
the idea of introducing a new Zimbabwean gold-based currency to the existing
“multi-currency” arrangement.
This new currency could be provided by a monopoly issuer, like a central
bank, or it could be issued by multiple
commercial banks, as is the case today in Scotland for example.
The new gold drachma might even become popular in the eurozone itself. Many
Europeans seem to want to own Swiss franc-based assets, presumably because
they perceive some independence from all of the problems related to the
eurozone. A sound gold drachma might be even more popular than a floating
Swiss franc. Greece could become a financial center as a result.
The modern drachma was created in 1832, soon after the establishment of the
modern state of Greece, as independent from the crumbling Ottoman Empire. It
replaced the Ottoman kurus as the currency of Greece. The 20
drachma coin contained 5.8 grams of gold. Paper banknotes, linked to
gold, were issued by the National Bank of Greece beginning in 1841.
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