I continue to adhere to my position since the beginning of the crisis
that it would be best for Greece to make every attempt to stay in the Eurozone.
However, since a possible Grexit is more and more being talked about as though
it was the most natural thing to happen soon, I want to dispel some myths about
a Grexit.
The operational challenge is often cited as the major reason why a Grexit should be avoided at all cost. My point is that the operational challenge of a Grexit would be absolutely manageable. Instead, it is the economic risk for Greece’s future which should matter above all.
I only concern myself here with the operational challenge of a possible Grexit and I will address the key issues. We are at point A where Greece’s currency is the Euro and when we reach point B, Greece will have the Drachma as a perfectly well-functioning local currency. The critical period is the transition from point A to point B.
Contrary to general assumptions, Greece does NOT have to physically create the Drachma as a new currency immediately. That would be like putting the cart before the horse. Instead, Greece simply has to rename the Euro into Drachma within the national jurisdiction of Greece and create the “real” Euro as a new currency.
For the purpose of simplification, let’s call the “real” Euro the “Free-Euro” and the provisional new local currency (until the Drachma is fully in place) as the “Drachma-Euro”. Also, let’s assume that the Drachma-Euro would trade against the Free-Euro in a relation of 2:1. That is one Free-Euro buys two Drachma-Euros.
Domestic sphere versus cross-border sphere
This is the critical differentiation which needs to be made. The domestic sphere includes everything that takes place within the national jurisdiction of Greece. The cross-border sphere includes everything else.
Domestic sphere
A simple law would stipulate that, effective immediately, all non-cash items within Greece’s jurisdiction are renamed from Free-Euro (that is the Euro as in the common currency) into Drachma-Euro at a relationship of 1:1. Examples of non-cash items: assets/liabilities of banks, public institutions, corporations as well as their incomes/expenses, etc. to the extent that they are booked within the national jurisdiction of Greece. With one stroke of a pen, there would no longer be the Euro (Euro as in the common currency) in Greek bookkeeping accounts. No new accounts would have to be opened. Instead, existing accounts would simply be renamed.
As a result, all non-cash transactions could be handled as before except that they are now in Drachma-Euros which have a value of 2:1 against the Free-Euro. The Bank of Greece would have unlimited capacity to create Drachma-Euro liquidity.
The real challenge would be the cash items. The general view is that Greece would have to arrange, top secretly, that new Drachma cash is printed/coined/distributed. Far from it! One would simply say that all existing Euro-cash in circulation will, effective immediately, be considered as Drachma-Euros within the national jurisdiction of Greece. To evidence that, all existing Euro-cash would be stamped as “Drachma-Euro” when it comes into circulation. The stamping would be done by the recipients of Euro-cash. Mind you: the stamping would only serve to get people accustomed that their Euro-cash is no longer worth 1:1 against the Free-Euro. Even if a Euro-banknote is not stamped, it would still only be worth 2:1 against the Free-Euro within the national jurisdiction of Greece.
How about those who use Euros from abroad (i. e. tourists) in Greece? Will their Free-Euros only be worth Drachma-Euros? Not at all. Those people would do what they did before the arrival of ATMs: go to a bank and show evidence that they have “imported” their Euros from abroad and they could exchange those Free-Euros at 1:2 into stamped Drachma-Euros (see capital controls below).
The specific charme of this is that those who have hoarded Euro-cash under matrasses suddenly discover that, effective immediately, their Euro-cash is worth only 2:1 against the Free-Euro as long as it is used within Greece. If they want to get a real Euro’s worth out of it, they would have to use it outside of Greece (see capital controls below). That would put all Greeks on equal footing, i. e. those who have hoarded Euro-cash would not be better off than those who left it in their bank accounts.
What would happen at ATMs? Very simple. The customer would withdraw, say, 100 Euros from the ATM and he would know that those are now Drachma-Euros, i. e. worth only 2:1against the Free-Euros. The logistics of adapting ATMs to the Drachma could be handled during the time, say 6-12 months, until the new Drachma has been designed/printed/circulated.
No new Drachma-currency would have to be designed/printed in a hurry. It would suffice to over-print the regular Euros with a simple stamp “Drachma-Euro” on them. Again, the stamping would only serve to get people used to the fact that their Euro-banknotes are no longer worth the same as a Free-Euro. In reality, that would be the case from day 1.
Capital controls
Transfers out of the country must be approved by the Bank of Greece. No restrictions as regards commercial payments. Restrictions on everything else.
Transfers into the country must be controlled as to the the sources of funds. No special controls as regards commercial receipts. Very strong controls as regards everything else. Transfers from an anonymous offshore company can only be accepted by a bank if the beneficial owner of that offshore company is revealed. Loans from an offshore bank can only be approved if the Greek borrower authorizes his lending bank in, say, Switzerland to reveal all collateral they have behind the loan.
Strict controls on the export and import of cash.
A temporary deposit freeze will be necessary during the transition period.
Implementation
A long weekend may not be enough time to get all the necessary legislation passed. Thus, a bank holiday must be announced but under no circumstances should that last longer than one week.
Cross-border sphere
That is where the economic risk lies. If the economy is not to come to a standstill, Greece will have to have pre-arranged a liquidity supply for imports.
The foreign debt is almost a non-issue. If the 350 BEUR before the Grexit were not sustainable, they will now be worth 700 BEUR and will be so much less sustainable. That is simply a question of negotiations as to how much of that debt will have to be forgiven.
The operational challenge is often cited as the major reason why a Grexit should be avoided at all cost. My point is that the operational challenge of a Grexit would be absolutely manageable. Instead, it is the economic risk for Greece’s future which should matter above all.
I only concern myself here with the operational challenge of a possible Grexit and I will address the key issues. We are at point A where Greece’s currency is the Euro and when we reach point B, Greece will have the Drachma as a perfectly well-functioning local currency. The critical period is the transition from point A to point B.
Contrary to general assumptions, Greece does NOT have to physically create the Drachma as a new currency immediately. That would be like putting the cart before the horse. Instead, Greece simply has to rename the Euro into Drachma within the national jurisdiction of Greece and create the “real” Euro as a new currency.
For the purpose of simplification, let’s call the “real” Euro the “Free-Euro” and the provisional new local currency (until the Drachma is fully in place) as the “Drachma-Euro”. Also, let’s assume that the Drachma-Euro would trade against the Free-Euro in a relation of 2:1. That is one Free-Euro buys two Drachma-Euros.
Domestic sphere versus cross-border sphere
This is the critical differentiation which needs to be made. The domestic sphere includes everything that takes place within the national jurisdiction of Greece. The cross-border sphere includes everything else.
Domestic sphere
A simple law would stipulate that, effective immediately, all non-cash items within Greece’s jurisdiction are renamed from Free-Euro (that is the Euro as in the common currency) into Drachma-Euro at a relationship of 1:1. Examples of non-cash items: assets/liabilities of banks, public institutions, corporations as well as their incomes/expenses, etc. to the extent that they are booked within the national jurisdiction of Greece. With one stroke of a pen, there would no longer be the Euro (Euro as in the common currency) in Greek bookkeeping accounts. No new accounts would have to be opened. Instead, existing accounts would simply be renamed.
As a result, all non-cash transactions could be handled as before except that they are now in Drachma-Euros which have a value of 2:1 against the Free-Euro. The Bank of Greece would have unlimited capacity to create Drachma-Euro liquidity.
The real challenge would be the cash items. The general view is that Greece would have to arrange, top secretly, that new Drachma cash is printed/coined/distributed. Far from it! One would simply say that all existing Euro-cash in circulation will, effective immediately, be considered as Drachma-Euros within the national jurisdiction of Greece. To evidence that, all existing Euro-cash would be stamped as “Drachma-Euro” when it comes into circulation. The stamping would be done by the recipients of Euro-cash. Mind you: the stamping would only serve to get people accustomed that their Euro-cash is no longer worth 1:1 against the Free-Euro. Even if a Euro-banknote is not stamped, it would still only be worth 2:1 against the Free-Euro within the national jurisdiction of Greece.
How about those who use Euros from abroad (i. e. tourists) in Greece? Will their Free-Euros only be worth Drachma-Euros? Not at all. Those people would do what they did before the arrival of ATMs: go to a bank and show evidence that they have “imported” their Euros from abroad and they could exchange those Free-Euros at 1:2 into stamped Drachma-Euros (see capital controls below).
The specific charme of this is that those who have hoarded Euro-cash under matrasses suddenly discover that, effective immediately, their Euro-cash is worth only 2:1 against the Free-Euro as long as it is used within Greece. If they want to get a real Euro’s worth out of it, they would have to use it outside of Greece (see capital controls below). That would put all Greeks on equal footing, i. e. those who have hoarded Euro-cash would not be better off than those who left it in their bank accounts.
What would happen at ATMs? Very simple. The customer would withdraw, say, 100 Euros from the ATM and he would know that those are now Drachma-Euros, i. e. worth only 2:1against the Free-Euros. The logistics of adapting ATMs to the Drachma could be handled during the time, say 6-12 months, until the new Drachma has been designed/printed/circulated.
No new Drachma-currency would have to be designed/printed in a hurry. It would suffice to over-print the regular Euros with a simple stamp “Drachma-Euro” on them. Again, the stamping would only serve to get people used to the fact that their Euro-banknotes are no longer worth the same as a Free-Euro. In reality, that would be the case from day 1.
Capital controls
Transfers out of the country must be approved by the Bank of Greece. No restrictions as regards commercial payments. Restrictions on everything else.
Transfers into the country must be controlled as to the the sources of funds. No special controls as regards commercial receipts. Very strong controls as regards everything else. Transfers from an anonymous offshore company can only be accepted by a bank if the beneficial owner of that offshore company is revealed. Loans from an offshore bank can only be approved if the Greek borrower authorizes his lending bank in, say, Switzerland to reveal all collateral they have behind the loan.
Strict controls on the export and import of cash.
A temporary deposit freeze will be necessary during the transition period.
Implementation
A long weekend may not be enough time to get all the necessary legislation passed. Thus, a bank holiday must be announced but under no circumstances should that last longer than one week.
Cross-border sphere
That is where the economic risk lies. If the economy is not to come to a standstill, Greece will have to have pre-arranged a liquidity supply for imports.
The foreign debt is almost a non-issue. If the 350 BEUR before the Grexit were not sustainable, they will now be worth 700 BEUR and will be so much less sustainable. That is simply a question of negotiations as to how much of that debt will have to be forgiven.
Klaus, was this ever tested in practice? Is there a historic example for such a transition that exactly follows your suggestions?
ReplyDeleteThere have been several currency unions/break-up's. This article lists some of them and you can get details about each one of them in Wikipedia (there were several more!).
ReplyDeletehttp://www.guardian.co.uk/world/2001/dec/10/euro.eu
I draw particular attention to the Latin Monetary Union because it included Greece, Greece became the problem and was kicked out, re-joined later and, finally, the union had to be dissolved.
I have lived in Argentina during the Peso/Austral change in the 1980s. That was simply a currency change, not a currency break-up. Still, it unsettled people psychologically quite a bit when the currency which they were familiar with was phased out and a new currency which sounded strange was introduced.
20 years later, Argentina had a real currency break-up from USD back to pesos, the difference with Greece being that they had never abolished the peso in the first place. Still, all bank USD deposits were forcibly exchanged into the devalued peso.
No, I have not written this from practical experience; only with common sense in mind. Anything is a currency as long as the recipient accepts it as payment for something. If Bill Gates writes on a piece of paper that he will pay 1.000 USD upon demand, that’s probably as good as money (whether or not it is also a legal currency is another matter).
Of course, it is a shock when citizens discover overnight that their currency only buys half of a foreign currency when, the day before, it bought 100% of a foreign currency. The even greater shock is when hoarders of Euro-cash discover that their hoarding hasn’t served the original purpose. But you can’t return from a strong foreign currency (Euro) to a weak local currency (Drachma) without substantial shocks. That's why I continue to warn about a Grexit.
The important thing to bear in mind is that, within its national jurisdiction, Greece can do just about anything it wants to and it will apply to all people/companies/institutions within that national jurisdiction. All of this is, of course, in conflict with EU law which is why a Grexit, one way or another, would have to be accompanied by some form of (at least temporary) elimination of EU laws. Otherwise, any Greek who loses as a result of a Grexit could sue Greece in EU-courts (and would win!).
I haven’t tested my proposal with “wise men”. As I said, I wrote it on the basis of common sense. I would really be interested to hear how my proposal would be challenged.
Thanks klaus. I wonder whether politicians like markus soeder know all these details, when they simply say that greece should be thrown out of ez.
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DeleteThere was a talk show on ARD last night which was probably the best and most informative one todate. Söder was among the guests. One key moment was when Otmar Issing (ex-Bundesbank and ex-ECB) was asked whether he understood the ESM contract. His answer: no. He was hoping that the court would clarify it. That says something when a financial expert needs judges to tell him what the agreed upon financial structure is all about.
I have met Söder. Even in his home state Bavaria he is known as a bully. But --- the man is not dumb! Whatever he says/does has a political purpose in mind and he often believes that the end justifies the means.
Let me try to interprete the Merkel-side of things (even though there is no longer anyone around who thinks he knows what goes on inside Merkel).
Even if the EZ-countries had zero sovereign debt today, the problem would be the same. In relation to what goes on elsewhere in the world, Europe has become a lazy continent where more and more free lunches are expected by the citizens (because politicians have promised them to them). Now, in the land of the blind the one-eyed is king. Thus, Germany, which had taken some measures to improve its competitive position in the last decade, looks like the king even though the German economy is by far not as strong and stable as everyone makes it out to be. Let something happen to exports and unemployment will explode.
Name me a large country outside Europe where very large parts of the employed people (civil servants) have absolute job security! Greece may be record holder but other countries are not far behind. Those who have that job security may consider that as a natural right but --- where does it say so?
So I really donn't think that the primary issue is competitiveness within the Eurozone. The primary issue, to me, is competitiveness of Europe within the global village of the world. Europe has for centuries been in a - probably well earned and well deserved - preferred position. The rest of the world had no alternative but to acquiesce. But thanks to globalization, the rest of the world has reached a position of fair chance to compete. And, by golly, when hungry people start competing with saturated people, it's going to be an uneven fight.
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DeleteWhat motivates people to start acting, I believe, is when they see their living standard decline. Had it not been for the Euro, the living standard of countries such as Greece would have declined. Instead, it artificially increased dramatically (until it slumped recently).
In some of the Greek blogs I read readers' comments where I can only wonder whether these readers still have a sense of reality. Can I blame them? No! They have been "trained" to think that way. But if we all allow ourselves to think the wrong way, there will sooner or later be a tsunami of other countries who think the right way.
To be specific: if the trade-off were that Greece is forgiven ALL its debt but, in exchange, Greece will overnight become a competitive economy, that - in my opinion - would be a fair trade-off for Europe as a whole. If Greece does not become competitive, it will face the future of the ex-DDR: living standard only due to massive transfers from elsewhere. The German East gets those massive transfers from the West because, after all, it's one and the same country. I doubt that the South will get such massive transfers from the North "forever".
So I really think that it is in the foremost interest of Greece itself to become a competitive economy. Greeks, for historical reasons, seem to have that enormous desire for self-determination. You can only reach self-determination if you become less dependent on the funding from others.
Actually, I think Greece would have quite strong cards to play the game of resistance. The EU can probably not afford to have the kind of economic basket case at its southern flank which Greeece would become if funding stopped. So, from that standpoint, Greece would probably be in quite a good position to literally "blackmail" (there I agree with Alexis Tsipras).
But the Latins would ask: cui bono? Does Greece want to be in that kind of a situation? Would that be reconcileable with Greek pride?
Nothing stimulates national energies as much as when the people feel that they are "on the move". Proof? Well, we see the opposite now in Greece.
So I really think that the key to everything is for Greece to reach a reasonable level of competitiveness. Not the world championship, but a reasonable level. Perhaps Greece should redefine the battle field for competition (perhaps less within the Eurozone and more outside of it). It is never smart to focus on the toughest battle field.
And, frankly, I think this is what Merkel is saying all the time. The trouble is that nobody, above all not Merkel, is communicating it well to the people concerned. Competitive levels are not achieved by mandate. They have to be developed (perhaps with a lot of aid/support from others). But, in my opinion, the key is summarized in the following Chinese saying: "Give a hungry man a fish and he eats once. Teach him how to fish and he eats for the rest of his life".
I have not seen this discussion on tv. Söder simply says what his voters want to hear. Is this dumb or not? Does he say right or wrong things? Does it matter? I think this crisis with all its complexity is a good example that everyone (every politician) can carefully pick out any facts supporting his political attitude. These arguments may be very convincing for lot´s of people. Other politicans pick out other arguments. The reality is somwhere in the middle and we don´t know how to continue.
DeleteIt´s quite amusing, that some politicians propose to ask the public, how to continue (plebiscite). That would be a Pfexit (political failure exit). They have miserably failed to solve the crisis. Now we all should tell them how to continue and think about contracts not even financial experts fully understand. If it gets even worse after this - who is guilty?
Surely there's a lot of similarities between a country leaving Currency Union and the break up of a state.
ReplyDeleteThere's been plenty of those, and much more recent, and in Europe. In fact there are 6 EU Members who have created their own currencies within the last 20 odd years, 3 of which have subsequently joined the Eurozone.
Yugoslavia -> Serbia, SLOVENIA, Croatia, Bos-Herz, Macedonian,
Czechslovakia -> CZESKA, SLOVAKIA
USSR - Russia, LITHUANIA, LATVIA, ESTONIA, Ukraine, Armenia...
What procedural difference would there between moving from the USSR (Russian) Rouble to the Estonian Kroon and moving from the EU Euro to the Greek Drachma.
CK
I think the primary difference is that the "surviving" Euro-countries have lent so much money to the exit-targets (I don't know to what extent this was the case with Yugoslavia, CZ, USSR). This money is certainly far from 100% worth today but with a Euro-exit of the borrowers, that worth would go very close to zero %.
DeleteLet me try this: let's assume one could have calculated a combined worth of Czechoslovakia and agreed that 60% belongs to CZ and 40% to Slovakia. Fair deal.
What if the worth of CZ had been hugely positive and that of Slovakia hugely negative?
These are just brain-winds, for lack of thinking about anything else on a Saturday evening.