For Greece (or any other fiscally-challenged member) to ‘leave the Euro’ involves the launch of a new curreny. From scratch. People talk as if the drachma lives on, cryogenically preserved in some icy Limbo for Currencies.
So the Greek government could thaw it out overnight, at some devalued exchange rate, and Bob’s your Uncle. This is moonshine. The Eurozone is not a fixed-exchange rate system, it’s a common currency area. The drachma has been abolished. This parrot is deceased.
Launching a new currency is a formidable undertaking in calm circumstances. In current Greek circumstances, and abstracting from the enormous logistic challenges, it is not do-able. There would be little point launching a new currency unless people could be induced to hold it. The prospectus would have to mention the debt ratio at 113% of GDP and rising, weak competitiveness, the largest adverse sovereign spread in the EZ and so forth. Who could be compelled to hold this currency even briefly (while it is being devalued) apart from domestic Greek recipients of pay and social transfers? Does anyone believe that the Euro would disappear from Greek trade and payments? Existing debts would have to be honoured in Euro – there is nothing else at present. Not even lawyers could hold that contracts were to be enforced in a currency which did not exist at the time the contracts were entered into.
There are 16 countries in the Eurozone, but 17 European countries use the Euro, the 17th. being Montenegro, which decided, at independence in 2002, not to launch a new currency. They use the Euro, do not get any of the seignorage as far as I know, but don’t have to spend half their lives in Frankfurt at ECB meetings, which sounds like a reasonable deal. (Memo to Montenegro: You may not have a currency to worry about, but you do have banks. Watch it!).
Who can say that Greece, having ‘left the Euro’, would not become a bit like Montenegro, with admittedly an unloved drachma for government internal transactions but most of the economy dollarised (or Eurinated)? Lufthansa reduces capacity a little on Athens-Frankfurt business class, but what else changes?
David McWilliams has advocated in his SBP column that Ireland should choose to ‘leave the Euro’. Please explain, in great detail (this is not a transition-year project) precisely
– how the introduction of a new currency in current circumstances would be executed, and
– how it would pan out in macro-policy terms.
German and other advocates of an expulsion option might join David in this exercise.