Greeks in crisis

Greece: currency in unchartered waters

Mark Garrison Jul 6, 2015
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Greeks in crisis

Greece: currency in unchartered waters

Mark Garrison Jul 6, 2015
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Behind all the talks and threats and proposals in the Greek crisis is the fear, or perhaps for some the hope, that Greece will disappear from the euro and start its own currency. Such a move would be unprecedented, so there’s little to draw upon to predict what such an exit might actually look like. But there’s some parallel in a historical event that for many people conjures up little more than dim memories from a Western Civilization classroom, if they evoke anything all: the breakup of the Habsburg Empire.

“It had a single market and a single currency from the 1860s until 1914, so this is actually a good model,” says Stephen Gross, an economic historian at New York University who looks at what modern Europe can learn from the empire.

It’s far from a perfect parallel, but Gross thinks it’s an example worth studying. He argues that the Habsburg Empire experience shows that the transition to a reasonably stable new currency could take far longer than policymakers expect.

As for what Greece may do if it comes to exiting the euro, a first step is already happening: strict controls on Greek bank withdrawals. But even with current limits, Greece could be unable to pay its bills, which means state workers and retirees wouldn’t get their regular checks, but rather IOUs.

“This will effectively be a new currency,” Gross explains.

Thinking of a printed IOU as currency may sound like a far-fetched idea, but as euros disappear, holders of the IOUs will be forced to use them to get daily necessities.

“It becomes a currency once you say, ‘OK if I receive an IOU from the government, because I’m a pensioner, then I can take it to the grocery store and exchange it for groceries,’ ” says Martin Baily, senior fellow at the Brookings Institution and a former chair of the White House’s Council of Economic Advisers.

But that still isn’t tangible money, just a quasi-currency. To really bring drachmas back from the dead, Greece must eventually print real notes: drachmas or something else. That could happen in a wealthy Athens suburb, where there’s a stately building with a lovely mountain backdrop. It belongs to the Bank of Greece and prints euros now. But it printed drachmas before and could potentially do so again.

If Greece expects the drachma to work, however, the country will need to make significant changes. 

“The Greeks are going to need internal reforms; they’re going to need political and financial transparency within their state; they’re going to need accounting standards,” says Jacob Soll, a history and accounting professor at the University of Southern California.

Paper money will likely be less of a concern than how the new currency is exchanged for euros, which is what regular Greeks have their bank accounts in. Their money could be frozen until it is converted to the new currency. And that conversion may not happen at a market rate.

“You’re likely to get something less, what would be typically called the official rate,” says Carmen Reinhart, international finance professor at Harvard’s John F. Kennedy School of Government.

That means Greeks could see their savings devalued, and life would become much more difficult, perhaps for a very long time. That’s why the prospect of a Greek exit, still hypothetical, is taken lightly by no one.

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