Painless Solution to Greek Crisis

The solutions to Greece’s financial dilemma are typically framed as a black-and-white choice between the country’s continued dependence on the euro or abandoning it in favor of the drachma.  Sadly neither choice seems to offer much encouragement.  Even their respective advocates accompany their analyses with any number of dire, and all too credible, predictions that following the other choice would lead to even worse consequences.  Austerity, economic decline, and eventual bankruptcy on the one hand, and contagious pandemonium on the other.  Hobson’s choice.

Given the reception such proposals have received thus far, there seems to be no harm in throwing another into the hopper.  Why not allow both the euro and the drachma to circulate as official currencies?  It is, after all, not such a radical notion; several countries today operate in that dual-currency mode either formally or informally.

The transition might come about in some such manner.  Let’s say Greece were to pledge as collateral a wad of fixed assets—a number of islands, say, a fleet of ships, their Ouzo distillery, the Parthenon, whatever—and, in exchange, the EU would allow the country to introduce enough drachma to meet all its obligations.  At the end of a fixed period of, say, twenty-five years, all drachma would be recalled at a one-to-one conversion rate.  With such a suddenly replenished treasury, Greece could comfortably meet its debt payments and begin to rebuild its economy introducing its critically needed reforms along the way.  Normal trade would resume and protests fade away.

Assuming that the euro would be treated as “good” money and the “drachma” as bad, the rule that “bad money drives out good” would likely take hold.  Euros would get squirreled away in bank accounts and drachma used in most internal transactions.  Especially at first, a lopsided open-market rate would likely prevail.  But several favorable changes would also result.  Greek goods would be more competitive on the world market, tourism would expand thanks to a strengthened euro, and interest rates fall.  Then, in time, as drachmas became more respectable and the settlement date approached, they would, I believe, be forced to rise in value.

Bondholders left with drachma could convert them in the free market that, initially at least, would leave them with heavy exchange losses.  On the other hand, they might prefer to hold drachma until such time Greece got on its feet and its currency stabilized.

At the end of the prescribed period, therefore, Greece would hopefully be on its feet able to withdraw the drachma, take its pledged assets out of the pawn shop, and see the Parthenon returned to its original site to the relief of all concerned.  Works for me.


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2 Responses to “Painless Solution to Greek Crisis”
  1. Phil Zwart says:

    I enjoyed this article. Thanks.

  2. steve kurtin says:

    Throw in the Greek Gods… certainly they are still worth something.

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