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Greece's Monetary Options
February 26, 2015
(This item originally appeared at Forbes.com on February 26,
Greece’s new government has been pondering how and when to
default on the mountain of debt it has inherited, which now
exceeds 175% of GDP. For some reason, this supposedly
entails “leaving the eurozone,” and possibly introducing a
new, independent floating currency, perhaps reviving the
But is this necessary? It is not necessary at all. A
“default” just means not paying some money back. This does
not require a government to issue a new currency, just as a
homeowner who defaults on a mortgage obligation is not
required to issue a new currency. You “just walk away,”
which is perhaps even easier on the sovereign level, since
the debt is not collateralized.
But let’s assume that, in a fit of pique, the European
Central Bank and other monetary institutions do decide to
exclude Greek institutions from the official eurozone
system, and in one way or another “kick Greece out of the
eurozone,” whatever that means in practical terms.
What then? Greece could continue to use the euro. It would
join ten other small states and territories that use euros
exclusively, without being part of the eurozone. These
include Andorra, Monaco, and Montenegro. At least ten
countries have a similar policy, but use the dollar instead,
including Panama and Ecuador, which dollarized in 2000.
Ecuador’s government defaulted on its sovereign debt in
2008, but continued to use the dollar afterwards. So, we see
that debt default, and the choice of currency in use, don’t
really have much to do with each other at all.
Five countries use New Zealand dollars exclusively; three
use Australian dollars; and one (Lesotho) uses South African
rands exclusively. Liechtenstein uses Swiss francs.
Greece is far larger than these tiny states, so although
such an outcome is technically possible, it might be a bit
uncomfortable politically. Greece’s government might then
consider an “open currency policy,” whereby any Greek entity
may use the currency of their choice. The government does
not officially endorse any single currency, and there is no
domestic currency. We might imagine that euros would
continue to be the primary currency in use, but perhaps
Turkish lira, Chinese yuan, and U.S. dollars could find wide
This solution is similar to that adopted by Zimbabwe, which
has no domestic currency and an official “multi-currency”
policy. The U.S. dollar is people’s primary choice, but
euros and South African rands are also popular. This is
despite the fact that Zimbabwe’s government is very
unpopular with the U.S. State Department.
Actually, this outcome is not so much different than the
situation in Greece before the adoption of the euro, when
German marks were often in use. Corporations and indeed the
government itself issued debt denominated in marks.
Another option for Greece would be to introduce a domestic
currency, but link it to the euro via a currency board
system. This arrangement is already in use by several states
that are not eurozone members, including Bulgaria, Bosnia,
Denmark and at least fourteen countries in Africa. It was
also in use by Estonia and Lithuania, before those countries
entered the eurozone.
Greece’s government could, of course, introduce its own
floating fiat currency, and mandate its use domestically
although I suspect the government itself would end up
issuing debt in foreign currencies before too long. A number
of economists have been promoting this idea, apparently for
the primary purpose of devaluing the currency by a large
amount immediately thereafter. Greeks themselves know a
little about this: between 1981 and 2000, when the euro was
introduced in Greece, the drachma fell
to one-eighth of its initial value against the U.S. dollar
This was so successful that Greeks trashcanned their old
junk currency and embraced the euro.
world is full of junk currencies
, and Greeks know
exactly what results they produce. If the government is
going to introduce a new currency on the world stage, it
should have at least a hope of being better than the euro,
yuan, dollar, or other options.
I suggest a new
drachma linked to gold
. The government would have a
“multi-currency” policy, where people could use any currency
they wish in commerce and as a basis for contracts,
including euros, dollars, or Russian rubles. Among those
options, would be the option of a gold-based currency.
Nobody needs to use it. They could use euros or dollars
instead. But, they could use it if they wanted to. It might
become popular, just as gold-based ETFs have become popular
worldwide as an investment vehicle. Zimbabwe’s government
recently floated the idea of introducing a new Zimbabwean
gold-based currency to the existing “multi-currency”
This new currency could be provided by a monopoly issuer,
like a central bank, or it could be issued by multiple commercial
, as is the case today in Scotland for example.
The new gold drachma might even become popular in the
eurozone itself. Many Europeans seem to want to own Swiss
franc-based assets, presumably because they perceive some
independence from all of the problems related to the
eurozone. A sound gold drachma might be even more popular
than a floating Swiss franc. Greece could become a financial
center as a result.
The modern drachma was created in 1832, soon after the
establishment of the modern state of Greece, as independent
from the crumbling Ottoman Empire. It replaced the Ottoman
kurus as the currency of Greece. The 20
drachma coin contained 5.8 grams of gold
banknotes, linked to gold, were issued by the National Bank
of Greece beginning in 1841.
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