Cubans prefer U.S. dollars to their own pesos. That’s what happens when governments issue a currency that the people don’t trust. But a dual-currency regime like this might the least bad way of keeping Greece inside the euro.
Suppose the new Greek government refused to accept the fiscal conditions attached to its bailouts. Greece’s euro zone backers would still want to dodge another default and a messy euro exit. They could avoid financial mayhem by paying the coupon on existing Greek debt, while punishing Greece by refusing to hand over more bailout euros. The government would run out of euros. Rather than not pay state employees and pensioners, it might issues IOUs. These would quickly spread through the economy, becoming a sort of sub-euro. Thomas Mayer of Deutsche Bank has suggested the new pseudo-currency be called the geuro.
Geuros would be issued as ersatz euros, but foreigners wouldn’t believe the government could deliver the real thing anytime soon. They would only accept the geuro at a substantial discount to the euro. The initial geuro-euro exchange rate could be punitively low – Mayer suggests less than 50 euro cents for each geuro. But the shift to a part-geuro economy would bring the benefits of devaluation. Even though the euro was still Greece’s official currency, imports would be more expensive and exports more competitive.
The geuro could make everything worse. Greek banks would become insolvent as borrowers offered only geuros to repay euro loans and savers tried to take their euros out of the country to avoid being repaid in devalued geuros. Mr. Mayer suggests a solution: turn Greek banks into a national bad bank to be managed and funded by the euro zone. That would work – but other euro zone members would be horrified. They’d hate the losses, the responsibility for managing a troubled economy and the violation of the principle that the European Central Bank controls money throughout the euro zone.
A big risk would remain: the Greek government might want to soften the pain of losing a hard currency by offering generous geuro pay raises. That is the path to high inflation. Mr. Mayer thinks, or perhaps hopes, that the psychological pressure would work in the opposite direction. He suggests that the shame and unpopularity of this partial departure from the single currency could inspire Greece to get its house in order, so it could soon revert from geuros to the real thing.
If the geuro transition were mismanaged, panic could destroy the new pseudo-currency, and bring down much of the rest of the euro zone. Even if all goes well, Greeks would have to deal with the confusion of running two currencies at once. And both Greeks and non-Greeks would face real losses, although the weakness of Greece’s economy makes damage unavoidable in whatever currency it is measured.
It is easy now to think of better ways to have managed the euro zone in the past. But “if only” cannot deal with the current problems. The geuro would be messy and risky, but it could be the least bad way forward.