Financial experts are asking whether a parallel currency could be the way out of the crisis – By Mark Schieritz
Europe is again staring into an abyss. Two years after the first rescue program was implemented for Greece in May 2010, it’s becoming ever clearer that the current crisis strategy has failed. The Greek economy remains in a tailspin, the country’s companies can’t compete on the international markets and public refusal to accept the austerity requirements set by Brussels is growing. Anti-austerity parties already look poised to gain a majority in the next parliamentary elections – and even if they don’t, implementing the tough reforms is only likely to get more difficult.
That puts the EU in a dilemma: If it gives in and eases its terms then the other crisis countries could follow suit and demand concessions for themselves. They’ll be asking the justified question: Why are the Greeks being allowed to get away with something the Spanish are being denied? It could herald the end of all consolidation efforts. Under such conditions, the continuation of the bailout programs would be impossible to sell to the German public.
But if Brussels sticks to its guns, financial assistance to Greece would have to be stopped. The government would then run out of money and – if it were to uphold its own rules – the European Central Bank (ECB) would not be allowed to supply the country’s banks with fresh euros. Greece would have to introduce its own currency.
In all probability, that would spell disaster for the country. The currency would devalue, which would help the export sector sell goods abroad and restore competitiveness. But at the same time there would be a collapse in the banking sector and during the changeover to the new currency, Greece’s citizens would lose the bulk of their savings.
It would also be a disaster for Europe, threatening to trigger a run on banks in the other crisis countries by depositors who fear their currency could be next. That could result in a Europe-wide contagion that could only be stemmed, if at all, by new multi-billion euro bailouts.
So it’s no wonder that the search for alternative solutions in Brussels is as frenzied as it is unsuccessful. For a while now, a new idea has got the experts abuzz: a system of parallel currencies.
For Greece that would mean that the EU wouldn’t halt financial assistance payments completely should negotiations with Athens fail. It would support the banking sector so that Greek investments in euros would be protected and retained. But amid a dearth of fresh euros from the ECB, the government would repay its debts by issuing debtor notes that would soon catch on in domestic monetary transactions as a second currency. Thomas Mayer, Chief Economist at Deutsche Bank and a proponent of the idea, calls the currency the “Geuro”.
Increasing numbers of people would use the Geuro for shopping and more and more companies would pay their wages in the currency. The Geuro would quickly devalue against the euro, thereby improving Greek export opportunities just as a complete currency conversion would do, but Greece would regain its international competitiveness without having to give up the euro altogether.
The danger of a flight of capital in the rest of Europe would also be thwarted because it would show people in Spain and Italy that even during such a serious crisis, their savings would stay in the bank and were therefore safe. After Greece’s economy was back on its feet, the government would gradually withdraw the Geuros from circulation and the euro would resume its former role.
It sounds like squaring the circle, but there is a catch: Bank deposits could only remain in euros if debts were repaid in euros. After all, debts and obligations are two sides of the same coin. That would leave the majority of Greek businesses and private households totally indebted, paying off their euro debts with Geuros that were worth perhaps only half. With few in a position to do that, Greece could face a massive wave of bankruptcies.
The government would share exactly the same fate. Its tax revenues in Geuros would render it incapable of meeting its obligations to private creditors and the international community. In effect, European governments would be allowing Greece a partial debt default. The question remains, however, whether such a debt default would be easier to sell to voters in the north than new loans would be.
Another variation on the idea of the parallel currency is building a consensus in northern countries. It would give people there the choice between the euro and a new hard currency, dubbed the “Guldenmark” by Berlin-based economist Markus Kerber. This would provide a way of protecting citizens in stable countries from potential inflation.
It would be left up to businesses and households whether or not to convert credit agreements to the Guldenmark or stick with the euro, and because a stable currency is close to the hearts of people in the north, the Guldenmark would gradually catch on and increase in value against the euro.
But there’s a series of problems with this scenario too. There would be a period of chaos during the transition to the parallel currencies, not least because not everyone is likely to back a conversion. Debtors would prefer to keep the euro in credit agreements, because its devaluation would mean their debt would diminish; meanwhile, there’s likely to be a lot of support among creditors for the Guldenmark. Employees would prefer to be paid in stable Guldenmarks, while employers would favor paying in the weaker euro because it would be cheaper for them.
And even if at some point all domestic financial transactions were carried out in Guldenmark, issues would still remain. Foreign debtors, for example, certainly wouldn’t convert their credit agreements into the new currency. And that would mean that savings abroad would lose value when converted back into Guldenmarks. In addition, the appreciation of the Guldenmark would mean the export sector would suffer too.
In the end, the Europeans will have to decide. Do they want to keep the euro or not? Parallel currencies are not a solution.