Watching eurozone politicians’ recent dithering has not been pretty and hearing ECB officials speak of Greece not being bankrupt sounds weird so I guess it is not strange that some have started writing about a breakup of the eurozone.
This is easy and possibly appeals to many but every time one thing is missing: How to engineer this breakup and reintroduce national currencies? It is not so strange that this element is missing for, as far as I see it, it is close to impossible to break up the eurozone. Adopting the euro is a one-way street – there is no turning back, which of course offers implications for Latvia whose goal it is to adopt the euro by 2014.
Here is how I see it. Imagine some representative Greek person: Someone with an income in euros, a small pot of savings in euros in a Greek bank and a mortgage loan in euros and from his Greek bank. Creating the euro was the biggest monetary logistical operation in history as a lot of paper currency and coins had to be printed and distributed, accounting procedures in companies had to be changed to euros, financial contracts had to be rewritten in terms of euros at the irrevocably established conversion rates, vending machines and parking meters had to be fitted to accept euros etc etc.
Imagine that talk gets serious about Greece leaving the eurozone. Everyone knows that the reason for reintroducing a new drachma is to let it devalue sharply to regain Greek competitiveness that has been eroding steadily in the past decade. Our Greek friend should thus be concerned about his savings – they are in euros but will be converted into drachma and devalued. A smart move would be to shift them from his Greek bank to a foreign bank. If all Greeks do this the Greek banking system will collapse. People in Spain and Portugal will know that they are next in line for reintroduction of their old currencies and will act similarly, thereby sinking Spanish and Portuguese banks and in the end we have banking collapses in all of the eurozone except Germany (and a couple of other countries, perhaps). The cost of such a systemic collapse is, well, infinitely high implying that it is worthwhile to avoid at virtually any cost.
The big problem – and this is where eurozone countries are very different from Argentina or Iceland, which are often brought up as comparators – is having the euro and not one’s own currency. Devaluation of a national currency can be done quickly and by stealth, thus avoiding the banking crises mentioned above. Reintroducing one’s own currency to let it devalue takes a long time and is impossible to keep secret.
OK, tougher measures: What about imposing capital controls in Greece, i.e. not allowing bank deposits to be moved abroad? Greeks would still move (or hide) whatever cash euros they might get their hands on (and I don’t think we can expect strip searches of all Greeks leaving Greece), firms and people would be unwilling to accept bank transfer euros as they will be devalued and will instead put a premium on receiving cash euros. The result is again problems for the banking system, which becomes more and more superfluous while Greece becomes a cash-only economy.
Or what about an overnight exchange of all savings, loans, prices, wages into “new drachma”? All deposits, one’s wage etc being redenominated from its euro amount to an equivalent drachma amount. The physical drachmas would still be lacking, however, as they take a long time to print. Again, one should expect a massive hoarding of cash euros and a black market would undoubtedly appear for euros, thereby devaluing the still non-existing physical drachma. But most likely this cannot be done overnight (and in particular not without quite a few people knowing of this in advance and thus not by stealth). Information would have to be spread to numerous banks, employers etc. Plus, of course, one should expect an avalanche of lawsuits alleging that such a conversion is illegal.
My imagination might be poor but I just cannot conceive an orderly way by which a new drachma could be reintroduced without serious repercussions as described above – which is why a new drachma will not be reintroduced and why Greece, although lacking competitiveness, must continue with the euro. Thus talk about the breakup of the eurozone is just that – talk. The costs of breaking up are so high that any benefits of doing so, however high, cannot match them.
At least that is what I think….. I don’t mind admitting that speculating about this these days feels like being on somewhat shaky ground.
Lessons for Latvia? If the country wants to join it must adhere to policies that do not create another Greece, i.e. strict fiscal discipline and a ‘German’ attitude towards cost competitiveness. Alas, no repetition of 2004-07.
Morten Hansen is Head of Economics Department, Stockholm School of Economics in Riga
Komentāri (45)
aivarstraidass 15.08.2011. 11.50
>>> Imagine that talk gets serious about Greece leaving the eurozone. Everyone knows that the reason for reintroducing a new drachma is to let it devalue sharply to regain Greek competitiveness that has been eroding steadily in the past decade. Our Greek friend should thus be concerned about his savings – they are in euros but will be converted into drachma and devalued.
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Unless we hold dear the ideas of Valentin Pavlov (the last Soviet prime-minister, who introduced money reform in the USSR in 1991 – by sharply withdrawing all 50 and 100 ruble bills with a 3 day transition period) – this does not need to happen. If somebody (no matter – German, Greek or any other private citizen or company) owns euros, then they own euros and nobody is going to confiscate or forcibly nominate them in drachmas.
If drachma is re-introduced, then this would probably mean that everyone is holding on to their old savings in euros, but Greek government at some moment starts paying its people in drachmas. So for some time euros and drachmas will circulate in parallel and will be traded at whatever currency exchange rate they will have.
Of course this re-introduction will be painful – real earnings in Greece would sharply go down (since the initial exchange rate would not hold) – but it is sometimes better to have horrific ending rather than an unending horror. Other alternatives are even less appealing – EU could start treating Greece (or Latvia for that matter) as some kind of a US state rather than a sovereign nation. If federalism becomes stronger, if there are more centralized control over what Greek government is allowed to spend (and therefore – ECB is more willing to bail them out, if something bad happens), then it becomes doable and we can preserve euros everywhere. But this would be the beginning of some new entity (EU-empire?) and the end of sovereignty in some of the 27 member states.
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simpsons > aivarstraidass 15.08.2011. 23.26
Ieviest drahmu kā papildus naudu eiro nav īsti reāli. Banku aktīvi (kredīti) paliks eiro, bet kreditori (iedzīvotāji) izņems eiro. Aizņēmumi – gan uzņēmumu, gan privātpersonu, gan valsts paliks eiro. Neviens nevarēs izpildīt savas saistības un VISI bankrotēs?
Neizkausās pēc reāla scenārija. Drīzāk ļaut, lai bankrotē Grieķijas valsts, parauj līdzi dažas savas, Francijas un Vācijas bankas. Tas tomēr nebūtu pilnīgi visu bankrots.
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loptik 15.08.2011. 18.24
The whole Greek hysteria is blown out of proportions by the US financial markets traders/analysts who are eager to shift the costs to Germany via common eurozone bonds. As to Greeks, they would be insane to leave eurozone since being part of the project is the only credibility they have. I think a lot of people at the core Europe would sigh with relief if Greece left. The only problem remaining would be to deal with steadily appreciating euro… And the Greeks could continue their before-the-EU accession “success story” of regularly “improving competitiveness” through currency devaluations, inflation and political instability – in complete oblivion. I beleive, Greeks remember well this “success story” of old and will stick to euro at any cost.
(Off topic: one may also wonder where the successful enterprises of this continuous “improvement of competitiveness” vs. Deutsche Mark are. Considering that drachma was losing value almost all the time should be quite a lot of them around competing successfully in the German market.)
Of course, it means bankruptcies, unemployment etc. but bankruptcy is not such a big tragedy nowadays. I don’t think they have debtors prisons in Greece. Unemployment should not go higher than 25%. Which means that 75% of the workforce are quite happy “to have their jobs in these tough times”. To sum up, Greece will never leave eurozone… I think. :) Of course, nations sometimes go suicidal, for examples we should not look too far.
I would rather contemplate other scenarios. E.g., what happens if the brainwashing works and Ms. Merkel agrees to a common eurozone bond. And then, let us say, after a year, the bond issuance is deemed unconstitutional by German courts. Or… what happens if Ms. Le Pen puts up a good fight against the current French establishment. Or… what if the Northern League gains considerably in elections… etc.
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ArmL > loptik 15.08.2011. 20.29
And what happens if …
“… if we reached the point where Germany was outvoted on the ECB’s governing council by the debtor countries.”
Concerns Mount in Germany Over ECB Bond Buys
http://www.spiegel.de/international/spiegel/0,1518,780258-3,00.html
P.S.
There’s nothing so permanent as temporary measures.
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andris > loptik 17.08.2011. 14.28
Šķiet, ka naudas tirgus galvenokārt pastāv ASV. Viņiem izlemt, vai un uz kādiem nosacījumiem aizdot Eiropai. Tā kā “histērija” nav bez pamata, jo kuram tad gribas zaudēt savus ieguldījumus.
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loptik > loptik 17.08.2011. 16.04
Nu no vinju viedoklja protams. Man liekas gan, ka ekspozicija uz Griekiju ASV ir stipri pastarpinata (caur Franciju, Italiju un Vaciju). Es taa interpreteju, ka satraukums izskatas vairak tapec, ka eirozonas woes ierobezho ASV politikas izveli (un ASV intereses un finansu sektora intereses parasti stipri sakrit): it sevishki kreisajaas aprindaas stipro veelmi infleet un konsensusa velmi eksportet. Pateicoties Eiropas Ziemelju – Dienvidu inj-janj eiro neaprecie tik, cik gribetos un pamazam visa Eiropa saak tiesam klut kaa vacieshi – eksport-driven economies. Ja izdotos sachakaret Vacijas balance sheet butu daudz vienkarshak panakt vai nu eiro apreciaciju (ja tirgus nomierinas) vai inflaciju (ja nenomierinas). Protams, to var nosaukt visados vardos, piemeram “price level targeting” vai kaa UK pie 5 proc inflacijas atkartot mantru, ka “tas viss temporary”. Jebura gadijuma, Vacija tad butu vienaa laivaa ar visiem paradniekiem un visi kolektivi varetu uzmest penshus un dazhadus aziatus.
Vai varbut ir kada tiesha ASV ekspozicija uz ES Dienvidiem? Neesmu specs, butu interesanti uzzinat.
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andris > loptik 21.08.2011. 01.54
labs jautājums, ja godīgi- nezinu atbildi, jāpadomā!
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imants_cirulis 23.08.2011. 18.33
@ Paula – please be respectful of other opinions.
@ Boriss Kuzmins – If bank runs start anyway, then there would be completely other things to worry about, as bank runs are (usually) effect of a untrustworthy bank system, not the initial causes.
@ Armands Strazds:
-“Very true. This is why Latvia has to postpone its joining the EMU until its economy is developed enough to be internationally competitive at least at EU average. Everything below that, with “fiscal discipline” introduced, would lead to conservation/stabilization of underdevelopment.”
I see a significant difference between Latvia restoring its competitiveness outside of the EMU, while being pegged, and Latvia restoring its competitiveness while being in the EMU. Being in the EMU, would create more confidence in the government thus allowing it borrow more cheaply (thus saving money of tax-payers on interest rate payments).
If you refer to Latvia gaining competitiveness by devaluation, then that’s a completely different story…
-“Infinitely high is only the author’s exaggeration, and most probably the cost of upholding the ineffective and unsustainable monetary system, having caused already too much suffering for too many.”
It is indeed an exaggeration, but the argument remains standing. Right now we can see the price of the bailout which in the end is paid by the French, German and other taxpayers. What we cannot see is the losses which would take place. The described scenario in paragraph 3 makes me think that the bailouts are cheaper.
Have a nice day,
Mārtiņš
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