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I've heard (non-serious) talk that Germany should leave the Eurozone instead of Greece. The Euro would then fall in value and all would be better, supposedly.
That makes some logical sense, but I don't think it can work that way. Let's say the new DM-euro currency would suddenly be worth fifteen percent more than the now-depreciated new euro. Everyone would want to claim that their "old euros" should count as DM-euros and it would be very hard to suddenly introduce a border-defined scheme of money stamping. The problem would be Germany's to solve. Yes they could survive a massive inflow of currency from around the Eurozone (presumably checked by bank holidays elsewhere), but why would they wish to court it? Furthermore they have to count on the other countries to get the bank holidays right, which is likely but hardly certain.
Alternatively, let's say the new Drachma-euro is suddenly worth fifteen or twenty percent less. Logically that's quite similar to the first case. Now Greek currency holders would all wish to claim they had "old, real Euros, not the new silly Drachma-euros." Stamping doesn't arrive quickly enough to demarcate a difference. Currency will flow out of Greece, and maybe that's bad, but it's Greece's problem not Germany's problem. Greek-held currency is too small to create a big problem for Germany or elsewhere.
The Germans will strongly prefer that the Greeks leave the currency union and indeed that is how they talk.
On top of that issue, Austria, Benelux and France all pegged to the German mark, with varying degrees of strictness, for some time before the introduction of the euro. They will want to go with Germany and indeed they probably should go with Germany. The scenario of "Germany leaving" raises the awkward question of why won't they go too and how to coordinate the entire shift.
One way or another, Greece leaves first, if indeed the Eurozone breaks up.
Posted by Tyler Cowen on June 14, 2010 at 01:14 PM in Economics | Permalink
Just heard on Bloomberg: Greece debt rating reduced to junk. Altho, Germany may wish to clear out before it kills the country's monetary system.
Is any economist tracking Iceland? They've been bankrupt since 2008.
Posted by: T. Shaw at Jun 14, 2010 1:29:20 PM
Greece does not need to convert anything. They can just repay their debts in drachma and let the new currency float with the old one. There will be a chartelist demand for the new drachma as long as Greece only accepts them in payment of tax debt and requires companies to use them for official payment.
Posted by: azmyth at Jun 14, 2010 2:08:05 PM
Too optimistic, Nobody can say what would happen. In any case, a breakdown.
Posted by: Luis H Arroyo at Jun 14, 2010 2:13:25 PM
"Ordinary Germans have begun to reject euro bank notes with serial numbers from Italy, Spain, Greece and Portugal, raising concerns that public support for monetary union may be waning in the eurozone's anchor country." That's from June 2008.
If Germany leaves first (along with their old currency buddies) then the crisis is over. If Greece leaves, then questions will arise as to whether Spain, Italy and Portugal can hang on.
Posted by: 8 at Jun 14, 2010 2:28:58 PM
Although semi in the realm of fantasy. Couldn't Germany encourage the creation of private currencies based on assets (gold, silver, or whatever else holds value well). My understanding is that Germany doesn't have significant debt so they don't really need centralized monetary policy for the purposes of printing money.
This also solves the question of how existing euros would be converted into German notes.
Posted by: stephen at Jun 14, 2010 2:44:49 PM
stephen,
This article claims there were 65 regional currencies as of 2007. Germans get by without the euro
Posted by: 8 at Jun 14, 2010 2:54:40 PM
Prof. Cowen,
you assume that with a currency separation, the new currency (either the DM or the drachma) would instantly trade substantially above or below par.
But why would that be the case? It seems a problem that the issuing authority easily could and should avoid by printing (or otherwise creating) just enough DMs or drachmas to ensure parity at birth. Doing so would avoid the need for any precipitous flows of cash, currency controls, and other illiberal and likely to fail policies.
Over time, one would expect the currencies to drift apart as different levels of inflation appropriate to the national conditions take hold. Indeed, if they did not drift apart, the issuance of a new currency would have been pointless.
But by the magic of interest/currency parity, all of this can happen while maintaining full convertibility at all times.
Posted by: Ã?ternitatis at Jun 14, 2010 3:07:45 PM
"Ordinary Germans have begun to reject euro bank notes with serial numbers from Italy, Spain, Greece and Portugal, raising concerns that public support for monetary union may be waning in the eurozone's anchor country." That's from June 2008.
I have never ever seen or heard of any German ordinary or not that did so. The Telegraph is a british right radical tabloid. Dont believe anything they write for a second. Whatever the Telegraph writes, asume they lie, its the most likely thing.
Posted by: urgs at Jun 14, 2010 3:08:29 PM
I don't understand why Germany would have any real incentive to get off the Euro. It is my understanding that Germany uses a basket of different currencies to perform different functions and the Euro serves more as a inter country trade facilitator.
Posted by: Ryan Vann at Jun 14, 2010 3:21:18 PM
"Greece does not need to convert anything. They can just repay their debts in drachma and let the new currency float with the old one. There will be a chartelist demand for the new drachma as long as Greece only accepts them in payment of tax debt and requires companies to use them for official payment."
This doesn't make sense. Why would any country want to take Drachma in place of Euros? A domestic chartelist demand isn't going to cut it.
Posted by: Ryan Vann at Jun 14, 2010 3:26:56 PM
Germany will not leave the euro. Tyler is right that the old linkers from the EMU days would insist on going along. It is more likely that Greece will leave, but before that happens, expect a quiet restructuring of Greek debt. I was just reading that they are in a better position to manage it than they were a few months ago. There will be major efforts to do something, damned near anything, to keep the euro going.
Iceland is not in the eurozone, indeed is not even in the EU. Did not want anybody getting at their fisheries. So, they are out there by themselves, but who cares besides some British pensioners and insurance companies and banks? And the Brits are also not in the eurozone.
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