Financial Times
May 24, 2012
Based on the latest opinion polls, the Greek election could result in a highly confused outcome, with the new government being unable or unwilling to meet any budgetary terms acceptable to the Troika, but also unwilling to leave the euro voluntarily. What would happen then?
Economists like Thomas Mayer (Deutsche Bank) and Huw Pill (Goldman Sachs) have recently argued that, in these circumstances, Greece might resort to a “parallel” currency which would be used for some domestic transactions, while keeping the euro in place for existing bank deposits and for foreign transactions. Thomas is favourably disposed to the idea, while Huw foresees many problems with it.
Although I am not at all convinced that this would be a stable solution, since it might just be a prelude to much higher inflation in Greece, it is the kind of fudged development which can appeal to politicians. It could therefore have a part to play in the future of the eurozone. Anyway, it is destined to be widely discussed in coming weeks.
Let us imagine that the next Greek government refuses to comply with the Troika’s terms, and is therefore cut off from receiving further fiscal transfers to finance its primary deficit. This deficit was 2.3 per cent of GDP last year, and although it is scheduled to be eliminated by the end of this year, this would be unlikely to occur after the arrival of an anti-austerity government. Greece would therefore need to finance a primary deficit of at least 3 per cent of GDP (€6bn a year).
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1 comment:
It is good to see an acknowledgement that an internal currency for Greece would provide great relief to all but the idea of Greece issuing it in the form of joke promissary notes which carry a Euro redemption value but trade way below that nominal value because they are a joke - it is absurd and extremely nasty. The only people who will buy such bonds are bond vultures because their business is to insist that it is not a joke and press for settlement in full.
I have a better idea:
ISSUE A SOVEREIGN INTERNAL CURRENCY AND USE THE EUROS MORE CAREFULLY
Greece should ready itself to issue its own sovereign internal currency so that it is not dependant on new loans to run its own affairs and mobilise its own people and resources. There should be no change to Greece's relationship with the Euro. Accordingly the internal currency should leave the Euro with sole legal tender status and there should be no forced re-denominating of Euros into the internal currency. The two currencies will circulate side by side with both government and citizens preferring to keep Euros for existing Euro debts or purchasing foreign wealth and spending the internal currency on nationally produced wealth. This will enable Greece to function as a nation on its own currency and concentrate its remaining Euros where they are needed for trade with other nations.
The new currency should not be a promissory note of any kind. It should be a receipt acknowledging the unrewarded status of a contribution to the nation. Its unrewarded status is not a demand of wealth, it is an indication to the honourable that it deserves to be exchangeable for real wealth. With this moral basis for its issue, the currency will circulate within the nation. It is not funny money, all of it must be earned into existence. Its value will be as President Nixon said, based on the industry and goodwill of the nation. As an internal currency with a clear moral basis, its value can be more precisely defined as the goods and services of the nation that are a fair reward for the labour that was paid for by its issue.
While Greece continues to have enough use of Euros for its foreign trading needs, it should keep its internal currency entirely for its own internal use. The government should most definitely never issue it as debt or attempt to buy foreign currency with it or allow anyone else to do so. It is helpful that being neither promissory note nor legal tender, the internal currency has no enforceable value and therefore is unattractive for any kind of predatory acquisition.
From this point Greece will be in a good position to adapt to varying circumstances.
1. If its European partners allow it hold enough Euros to complete its trading with them then it should settle into a dual currency system and get to work ensuring that all Greeks receive at least a small Euro allowance in their income. This is important to avoid monetary ghetto-isation of incomes.
2. If the European Central Bank completely changes it policy and issues Euros to member states on a different basis that better serves their needs then it may be possible to retire the internal currency. It will have served to save Greece and the Euro during a period of poor management.
3. If its European partners refuse to cooperate and starve Greece of Euros so much that it is forced to trade internationally with its own currency then it should end the 'internal' limitation on its currency and make it legal tender so that it is of value to foreigners. Hopefully this will not happen before the internal currency has established a realistic measure of its value, at least in terms of the goods and service of Greece that can be bought with it.
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