Greece’s Monetary Options

Greece’s Monetary Options
February 26, 2015

(This item originally appeared at on February 26, 2015.)

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 name “drachma.”

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 adoption.

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.

The 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” arrangement.

This new currency could be provided by a monopoly issuer, like a central bank, or it could be issued by multiple commercial banks, 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. Paper banknotes, linked to gold, were issued by the National Bank of Greece beginning in 1841.