Reintroduce the Drachma

[discocrisco01]

Matthew Lynn has a good solution for Greece. He states reintroduce the drachma. He states

There is only one number you need to know to understand just how much is at stake as the leaders of the euro zone gather on Thursday for yet another attempt to come up with a rescue plan for the euro. Seven.

Once the yield on a country's ten-year debt - that is, the rate of interest that private investors demand to lend it money for a decade - breaks through 7%, it is effectively insolvent. It can no longer borrow from the bond markets. It will be forced to seek a bail-out from its partners in the single currency.



Spain is now well past 6%. Italy breached that rate briefly on Monday, and is still hovering dangerously close to it. The euro is one percentage point away from a chaotic collapse. One more piece of bad news - a resignation from Silvio Berlusconi's government, perhaps, or a bank collapse in Spain - and the game is up.



The time for dithering and delay is over. The markets are not interested in a plan to talk again in a month's time. They don't need another patched-up solution. And they certainly don't want to hear yet more empty rhetoric about the importance of European solidarity. What the EU's leaders need to do is show that they have the determination to make the tough decisions necessary to keep the single currency going.

Now that is wisdom that we have not heard for commentators. Most commentators scramble to a develop a potential solution for Greece, but find no creditable solution to solve the problem.

Yet, nobody is calling for Greece to leave the EU. Nobody. Out of all commentators, that is the best solution. Reintroducing the drachma and allow Greece to inflate its debts away is the best way to return Greece to solid footing.

Austerity and deflation are not helping Greece. It is better to inflate yourself out of the problem than try failed austerity measures.


http://www.huffingtonpost.co.uk/matthew-lynn/there-is-one-last-chance-_b_904176.html">(Huffington Post)

[badtoworse]

1. I can't see any lender accepting drachmas as payment for a debt denominated in euros

They would need to buy euros with the drachmas and the FX rate would skyrocket. (That is what happened in the German Weimar Republic after WW1.) Any imported goods would need to be purchased with another currency, such as dollars or euros so trhe price of those things would also skyrocket in drachma terms. As a practical matter, they would be no better off and they might even be worse off.

The fundamental problem in Greece is that the government is not taking in enough revenue (taxes) to fund all of its committments. Cheating on taxes appears to be the national pastime. Since they are ineffective in collecting taxes, they really have no choice but to cut spending.

We basically have the same problem. We are spending more than we get in tax revenue and have been borrowing to fund the difference. We can get away with it because the dollar is the world's de facto reserve currency and we can print as many of them as we want. Doing that, however, dilutes the value of the dollars and makes dollar denominated investments unnattractive. If this practice is taken too far, the world will stop using the dollar and will switch to something else. Once that happens (and it will if we don't change course), we will be unable to monetize (inflate away) our debt and we will be screwed far worse than we are now.

[muriel_volestrangler]

2. It's very difficult to do

There would be a run on all Greek banks, as depositors rush to get their euros out before they become new drachmas worth a lot less. It's the 'get the pain over at the start' solution - sudden inflation, putting up the cost of imports, but allowing businesses that can start again from scratch to develop in a manner in which they can export at a competitive level.

You'd have to work out what people's reaction would be to a massive increase in the price of imports, and what you'd do about Greeks hold euros in cash of banks outside Greece. Do you introduce currency controls so that the amount of currency they can bring in and out is heavily regulated? You don't want the rich (who will be able to do such transactions more easily) to benefit from the exit from the euro, but neither do you want them leaving their money outside Greece permanently.

[pampango]

3. Aside from the wisdom of a drachma's return, Greece wouldn't have to leave the EU to drop the Euro.

Several EU members don't use the Euro. It is messier for a country to have used the Euro then drop it than to have never adopted it in the first place.