21st March 2015

A way out for Greece

A dual currency

With Germany playing hard ball and the Greek's wish to remain in the Euro the answer may be to become a dual or bi-currency; to make both the Euro and a new Drachma legal tender. This would give the Greek the flexibility to organise their own economy as explained here. The devil will be in the detail but here's a suggestion.

Existing bank accounts would remain in Euros to protect against currency flight but public sector wages would be paid in new Drachmas. Tax would be paid in Drachmas except for overseas earnings or transactions involving the Euro. Imports and exports would remain in Euros and shops and services could choose to sell in Drachmas and Euros. Clearly the exchange rate could be very volatile to begin with before it settled down and this could provide an opportunity for exploitation so there would have to be legislation to fix prices for this period. If the exchange rate was set at 1 Euro to the Drachma, land prices and rents would be fixed in Drachmas. The treatment could also be extended to basic food stuffs produced within the country and electricity. Once the Drachma was introduced one would expect it to fall in value against the Euro with imports rising in cost. This would have some inflationary effect but as much of any economy is local in the form of services and agriculture this should not be too significant. With Drachmas the government would have the freedom to increase the money supply with the aim of returning GDP to its pre-crisis level. Because demand has already existed at this level providing the currency to return people to work should not necessarily be inflationary.

The accountancy of this new money is another matter. In theory as taxes will be paid in Drachmas from an initial stock of Euros it would become an ordered transition. However the central bank will need the resources to operate properly and the government will also require funds to expand public works to raise GDP. Some of this sum could be a fiduciary with the rest being raised from bonds. The exact split would have to reflect market sentiment to allow a return to raising money through the bond market. Changes to the banking sector would also be required. The simplest would be ATMs to dispense both or either currencies. People would generally require accounts for the two currencies. These of coarse would pay different interest rates and this would provide a driver for the economy; as discussed elsewhere on this web site as interest rates are the main driver for GDP in the economy. This would still leave the Euro debt but as the Greek government would also hold a Euro account it could pay off at will without impacting on public services or quality of life. As I am not an expert on European banking rules there may be other issues but if the will is there it could be done and it should be.

Greece's problems are not to do with laziness but monetary; there is not enough money in circulation which is caused by the restrictive rules of the Euro zone.

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