Monday, 21 May 2012

Greece leaving the euro

How to leave the euro? What is the actual mechanism? Bloggers across Europe are taxing their grey cells to work out how the "with one jump he was free" moment could be achieved. Lord Wolfson, CEO of the High Street fashion retailer Next, has even offered a £250,000 prize for anyone who can sort out the details.

Tory MP John Redwood has come up with a rather bizarre and unlikely mechanism whereby Greeks will have to change their euros at one rate but foreigners get a better rate. If that ever came to pass this blogger would stand outside a Greek bureau de change waving his British passport and offer to act as an intermediary for any Greek wanting to cash in euros. Fortunes would be made!

And rumours of course abound that there is a G20 Special Study Group based in Rome which is working out how the Greek extraction will take place; drafting the legislation, ordering up the new banknotes - all in conditions of strictest secrecy. No links for this, it is just a rumour.

This blog has discussed the issue before, and now will pitch in with an idea.

It's called "New Drachma - a parallel currency." (Btw, in City dealing rooms the New Drachma is already trading, despite official policy being that Greece stays in the euro, and nobody having the slightest idea of what a New Drachma would be worth.)

The parallel currency idea works like this. The Greek government, quite openly, announces it is going to print up a new currency, the aforementioned New Drachma, hereinafter called "ND", using its euro-printing facility in Athens. The ND will be "soft pegged" to the euro. It will be legal tender in Greece and will notionally be equal in value to the euro. There will be no obligation to use it; no-one will be forced to accept it as payment for debts, but the Greek government will start paying its employees in a 80/20 euro/New Drachma split. Yes, all civil servants will be getting 20% of their salary in NDs (to a certain amount of dismay of course). But, on the flip side the Government will accept NDs for payment of taxes at par with the Euro. Also ND will be acceptable for other payments for state services such as train fares, bus fares, other fees and the like: all at parity with the euro.

So the ND, despite being unwelcome, will retain most of its value. Also the Greek government should announce some major asset sales, eg sell off some of those Ionian islands by auction, with ND accepted at par with the euro for payment. I say "announce" because the longer they prevaricate on this, the better it will be. The mere prospect of being able to use the ND for some major purchases in the future will help hold up its value.

Once the ND has been introduced it needs to be ratcheted up. The 80/20 split should drift inexorably to 50/50 - aiming to arrive at 100% ND a few years down the line.

Clearly the ND is going to be unwelcome on the Greek High Street. Immediately retailers will be giving a discount for real euros. And it's likely that, despite the soft peg, when you deposit ND100 in your Greek bank account only €95 will actually get credited (exact amount depending on daily trading and how convincing the soft peg is.)

To help the ND's credibility it should look very similar to the existing euro, perhaps using most of the same design but in different colours. However it should not be easily confused with the euro - there is no intent to deceive here, merely to inspire confidence.

Gresham's Law states that bad money drives out good. Gresham was talking about gold money where high gold-weight coins tended to be hoarded and low-weight coins of the same denomination were used instead. This will apply to the New Drachma as well. People will save their euros to be used where a ND cannot be tendered. This means the ND will permeate rapidly throughout Greece on a "hot potato" basis. Before long they will be as common as euros, then after that more common.

On the debt side, existing euro-denominated debt will continue to be paid in euros, but where the Greek government issues new bonds these will be ND bonds. As old gilts expire and are refinanced with NDs so the Greek national debt will migrate into New Drachma.

However the Greeks do need to stop living beyond their means. The public deficit should be reduced to zero. A certain amount of money printing could make this less painful than it would otherwise be.

The final phase of the Greek euro-exit is then, when the euro has become rare, and the ND has found a free-floating market rate of its own, to drop the euro as a legal tender altogether. By this time (hopefully) most Greeks and Greek businesses will have already chosen to deal mainly in NDs and convert their bank accounts to ND voluntarily for their own convenience.

By this time there should be a bit of an economic boom underway in Greece based on cheap holidays, cheap exports and expensive import replacement with domestic production and likely there will be a national feel-good mood with Greeks laughing up their sleeves every time a German tourist buys a glass of beer using euros and gets given his change in New Drachma.

And there you go; Greeks out of the euro with no drama. Lord Wolfson should feel free to send the quarter of a mil prize to the British National Party for their campaigning funds.

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