A New Drachma?

by Elaine Schwartz    •    Jun 23, 2011    •    778 Views

According to a 2002 BBC report, Greece was the least prepared to make the switch to the euro in 2002. During the transition only 1/6 of all businesses in Greece had received their euros.

Now, Greece remains a dysfunctional euro nation. Can it leave? Not easily. (This NBER paper details the issues.

If Greece were to leave the euro zone, it would have to…

  • create and print “new” drachmas.
  • switch all contracts from euros to new drachmas. Loans, mortgages, wages, bank deposits, taxes, bonds, all would need to change.
  • restock and reprogram all computers, vending machines, and ATMs.

Also though, having power over its own monetary and fiscal policy, it could…

  • stimulate tourism and exports by depreciating its currency.
  • have more flexibility when spending and taxing.
  • unilaterally restructure its sovereign debt.

But then…

  • French and German banks would have to “mark to market” the value of the Greek bonds that they own.
  • Other weaker euro zone nations might decide to copy Greece.

Would the ripple lead to the demise of the euro zone?

The Economic Lesson

Countries typically use monetary and fiscal policy to affect domestic economic conditions. Monetary policy involves the supply of money and credit. Fiscal policy relates to spending, taxing and borrowing.

Recession? Borrow and spend more. But euro zone nations are not supposed to let deficits exceed 3% of GDP. Lower interest rates? The euro zone makes the monetary decisions.

An Economic Question: You can see the problem. Countries with different economic conditions lack the flexibility to respond to their own special needs. For example, how would fiscal policy differ for a nation with low unemployment and one with considerable joblessness? (Here, you can check unemployment statistics for the euro zone.)

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