A brief description of the Greek Drachma that was used as a currency unit for about 3000 years:
h/t to R. de Haan in comments here which points at this article:
Athens Mulls Plans for New Currency
Greece Considers Exit from Euro Zone
By Christian Reiermann
The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government’s actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area’s finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.
Greece’s economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.
Alarmed by Athens’ intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece’s possible exit from the currency union, a speedy restructuring of the country’s debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union — regardless which variant is ultimately decided upon for dealing with Greece’s massive troubles.
The article goes on from there to describe all the dire things that would befall Greece if it took this action. It ignores two very important points (or minimizes them). In emphasizing just how a Greek devaluation would double the national debt of Greece, it ignores the option of a Greek re-issuance of existing bonds. Greece could, quite simply, announce an official exchange rate for New Drachma, announce that all sovereign debt was now converted at that exchange rate, and then issue a circulating currency that it could inflate. The existing holders of those “Euro” bonds would be converted to holders of “Drachma” bonds despite what is printed on the paper they hold…
That would let Greece simply inflate away the massive debt it will never repay anyway.
The great losers here would be Germany and France (who have largely funded the bailouts).
The other major benefit to Greece is that they could once again use the favored tool of “bugger the currency” to make folks feel better while they are being screwed over. All their national pensions could be paid in full (just not buy as much), nobody would need to deal with “austerity” or taking a pay cut (just not be able to buy much with that ‘full pay’), and everyone could get back to living beyond their means for a while longer (until their lenders just stopped lending). Rising prices of food and fuel could be blamed on OPEC and the USA. Rising prices of products could be blamed on China and Germany.
But Wait, There’s More!
Where this gets interesting is that, should it work, you can rest assured that Portugal, Ireland, Italy, and Spain would be thinking “Austerity or Currency? Decisions, decisions…”
There would be a modestly rapid removal of several other countries from the Euro Zone, and the Euro itself would come under some significant pressure.
To the extent that the EU tried to force Greece to stay in the Euro “Or Else”, it could spread into an exit from the EU (and thus a destabilization of THAT political body).
The potentials here are just amazing.
What I Expect
I often rail against “expecting at” things. But everyone expects. So I recognize my expectations, while I just make sure that I act on what facts happen on the ground. Basically, it’s a ‘base line’ for measuring reality, not a decision guidline.
With that said:
I expect Germany will find a way to increase the “restructuring” and to make it even easier for Greece to not use that “nuclear option”. This will lead to the rest of the PIIGS wanting their share of the trough too… So we’re going to find out just how big IS that German Wallet… and how much the German people are willing to pay to be in this marriage with a spouse who has a Credit Card Problem…
At best we can have Germany supporting the PIIGS in a lavish lifestyle based on a hope of someday being repaid. At worst we can have a decision for the Euro to join the devaluation parade as a way to make life easier for the PIIGS. In between would be a German Popular Revolt (as they don’t get much out of this in either case).
Then there is always the possibility of the whole EU / Euro Zone doing a ‘rapid self disassembly’…
Now THAT would be fun to watch! ;-)