Thursday, May 17, 2012

A Local Currency in Greece

Sometime in the last 48 hours, the consensus of observers about the course of events in Greece changed. Maybe it was the political fumbling in Athens that changed people’s minds, or the Spiegel cover story that “screamed” (the headline was that shocking when people first saw it) “Time to Admit Defeat: Greece Can No Longer Delay Euro Zone Exit.” Whatever the cause, the consensus now is that Greece must withdraw from the euro quickly.

The withdrawal of Greece from the euro, if it happens, will cost the euro zone a fortune, and economists are scrambling to estimate the impact. The United Kingdom, which you might think would be out of harm’s way, is already making policy changes to mitigate the impact there. Early estimates of the disruptive impact across Europe range between 1 and 4 weeks of GDP, or perhaps $1 trillion.

It is a high price to pay when you consider how little Greece actually needs to work its way forward. All it needs to avoid a depression is enough money to pay its workers. Yet it clearly cannot get any more euros. To create money it will need another currency, presumably a new drachma.

The most disruptive thing about this in Greece will come from the legislative steps to ensure that the new drachma is accepted. Retailers will have to set prices in drachmas and salaries and pensions will have to be accounted and paid in drachmas. It will not seem like a high price to pay when set against the alternative of sustained depression-level unemployment. But of course, the ripples from Greece’s actions will have a broader impact, and Greece’s gain will be Europe’s loss.

Another solution, in theory if not in practice, would be if the whole euro zone were to issue more money in euros. This would be money the European Union and euro countries could use to meet their wage and pension obligations for several weeks. It would go a long way toward solving the crisis across the euro zone and would benefit most of the countries, while doing no particular harm in the countries where the extra money is not urgently needed. Alas, democracy and common sense are not the EU’s strengths, so nothing of the kind will happen.

It is an artificial and unfamiliar situation in Greece that the same currency used for the everyday local necessities of life, housing, transportation, food, and water, could be depleted by imports and financial payments sent outside the country. The local money shortage is exacerbated now by a run on the banks as Greeks and others withdraw money from the banks in Greece and place some of it in banks in other countries. If the international currency is too tightly controlled to be a solution to this problem, then the obvious next step is a local currency in some form. It is better if the local currency is issued by the government than if it forms informally on the black market, but it will come about inevitably, one way or another. That is the crossroads that Greece has come to.