Greece’s two currencies – Project Syndicate Op-Ed

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ATHENS – Imagine a depositor in the US state of Arizona being permitted to withdraw only small amounts of cash weekly and facing restrictions on how much money he or she could wire to a bank account in California. Such capital controls, if they ever came about, would spell the end of the dollar as a single currency, because such constraints are utterly incompatible with a monetary union. Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges. Read more here

10 thoughts on “Greece’s two currencies – Project Syndicate Op-Ed

  1. “’Don’t you think they want us to fail?’ That’s the question I kept hearing during a brief but intense visit to Athens. My answer was that there is no ‘they’ — that Greece does not, in fact, face a solid bloc of implacable creditors who would rather see default and exit from the euro than let a leftist government succeed, that there’s more good will on the other side of the table than many Greeks suppose.”

    This is what Prof. Paul Krugman wrote in the NYT on April 20, 2015. He did not see an intent “to force the country’s rebellious government to capitulate to the eurozone’s failed policies”. But, then, maybe Prof. Krugman has become a neoliberal.

  2. Dual currencies existed in Greece, and Cyprus and to a lesser extent Italy, Spain, etc. as soon as the implicit understanding of joint EU debt vanished, interest rates diverged, and the peripheral debt crisis broke out. Already at that point there were different risk premia on the Bank Euros of each country, where a BE in Greece or Portugal was de facto worth a little less than a BE in Germany. While the banks still offered transfers at par, many people were motivated to transfer their deposits and pocket the difference, and we had the great EU bank run. Capital controls formalised a fragmented multi-currency reality that was no longer possible to hide.

    So we already have multiple Bank Euro currencies and a common hard Euro payment currency. The different national BE currencies are attempting to maintain a peg, some more successfully than others and at different times. That is the reality. What is so bad then about accepting this and declaring BE to be separate currencies at floating rates, and regain the ability to generate inflationary liquidity and guaranteed cash flow by each national government? We already have separate national bank currencies attempting to peg. We already have a hard common payment currency. Eurozone countries need to grab hold of their national monetary policies within this system.

    • What Greece ought to do at this point is follow Brexit developments closely and be ready to act on the forces unleashed following the UK move to disengage from the euro-nonsense. Belrlin needs a packed punch in the face and Brexit will deliver it.

    • I agree with a slap to Berlin, but don’t want Brexit. The status of the Swiss or the Norwegians, or in fact the Brits vis-a-vis Europe is fine: Freedom to trade and to move, without the failed Eurozone monetary union.

    • Agreed on the Swiss and Norwegians even though what motivates them staying out of the EU is mainly large contributions necessitated by their much higher GDP and standard of living. They are staying out for the exact reason Britain wants to exit; the payment of large amounts to the common budget without any particular benefits. This is the same thing that sparked the American revolution: taxation without representation.

  3. The real question is: When Syriza started this epic 6-month 2015 re-negotiation with intransigent Berlin, you guys didn’t know about the 2 euro currencies being the Greek reality? And how did you prepare for it in advance? Or did you think that the ratzillas would be proven to be something less than intransigent? Did you harbor the idea of humane barbarians?

    How did Syriza become caught in a last minute dilemma without a plan B? It appears that there was no prior agreement to activate any such plan because basically Tripras invented his next move as he went.

    Didn’t we all know (and in fact discussed extensively here) that the PSI effectively gave the keys to the lenders and the Greek banking system became overnight the Achilles heel of any effort towards independence. Venizelos had already created the conditions for dual Greek euro currency the minute he signed on the PSI nonsense.

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