Neither Grexit nor a dual currency will solve Greece’s problems
A Grexit or the introduction of a dual currency is not a solution to Greece’s problems. On the contrary, it would be a worst-case scenario for Greece in the short term. Only in the medium to longer term, the resulting devaluation and improvement of price competitiveness would help businesses active in the export and import substitution sectors. For the euro area, a Grexit or dual currency would be a signal that the currency union is not made forever, even if the situation is much different from 2010-2012 as contagion effects to other euro periphery countries hardly exist today.
The negative short-term impact from a Grexit or from a dual currency would push the Greek economy into a very deep crisis and lead to further impoverishment.
The Greek financial sector, which is already rather weak, would be severely affected, particularly by further withdrawals of euros from bank accounts in the course of bank runs (among other aspects). Capital controls can only partly stop this from happening. The problems of the financial sector would lead to a further drying up of credit supply and the danger of bank insolvencies.
The risk of insolvency would go much beyond the banking sector and also include businesses and particularly the state. All private and public economic actors with sizeable debts in euros and under foreign law (debt which could not be converted to the new or dual currency) would suffer from higher debt counted in the dual or new currency. This is so because the dual or new currency would devaluate to a large degree versus the euro. Imagine the balance sheet of a bank or of a company with significant euro debts under foreign law: These liabilities would remain in euro but significant parts of the assets would be converted to the dual or new currency, which then devaluates. This would cut a deep hole in the balance sheet and could well lead to insolvency. A government default is most likely, because foreign debts would remain to a large extent in euros but tax revenues would increasingly come from the new or dual currency.
Insolvencies and the drying up of credit supply would lead to a significant rise in unemployment, costing even more people their job.
A government default could mean that public wages and pensions cannot be paid for a certain period of time or only in the new weak currency. Moreover, the fiscal problems would further aggravate the state of the economy and of banks that hold government bonds.
What could the merits of a dual currency be? The introduction of a new currency takes time, it cannot be done overnight or even over a long weekend. A dual currency could help bridge the time until an eventual full Grexit takes place. There are also proposals to have a dual currency only for a temporary period. In this case, a return to normal euro area membership (implying the abolition of the dual currency again) would be envisaged after a while. But these proposals would not be able to avert a severe crisis in the Greek economy.
An important drawback of a dual and parallel currency would result from problems of acceptance – this is what the experience of other countries clearly tells us. Two main reasons are relevant here: First, the bills or IOUs of a hastily introduced dual currency are not as secure as euro bills and coins. Thus, there is a lack of trust in the dual currency. Second, the dual currency would most likely depreciate versus the euro. Due to the likely lack of acceptance, it cannot be expected that “bad money will push out the good,” as it is sometimes thought. In order to push the dual currency into the economy, the government would have to impose obligatory regulations for the acceptance of the dual currency and, e.g. for paying wages and possibly also for converting bank accounts. Depending on what has to be converted or not, this would create further pressure on the balance sheets of economic actors.
Moreover, people would still prefer the more reliable value of the euro, so a large black market would very likely be created. What would this mean for a regular wage-earner? He or she would most probably get paid in the dual currency but many goods would likely only be available on the black market in euros. Due to the rapid depreciation of the dual currency vis-a-vis the euro, people would suffer from a loss of purchasing power and become even poorer. This is another important reason why neither a Grexit nor a dual currency would be good solution for the Greek people.
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* Jurgen Matthes is a senior economist and head of the International Economic Order and Economic Outlook department at the Cologne Institute for Economic Research.
