Photo: Deutsche Bank
Here’s a radical new idea from former Deutsche Bank Chief Economist and current Senior Advisor Thomas Mayer, based on the facts that a) Greeks don’t want to leave the euro and b) they also don’t want to continue with the Troika bailout programs as they are currently constituted.All of the talk to date has been of a binary option for the eurozone between a cooperative Greek government that gets to stay in the euro and a non-cooperative one (presumably led by the likes of Syriza boss Alexis Tsipras) having to exit the euro.
But maybe there’s a third option, just because the stakes are so high here. The rest of the eurozone doesn’t want to see a Greek exit because of the potential for other countries following suit (whether they contemplate leaving as well or experience similar runs on bank deposits), which would be disastrous.
What would that middle ground look like? According to Mayer, the Troika could decide on “a partial stop in financial assistance, with continuing support for debt service needs and the Greek banking sector but no further support for the financing of the government’s primary expenses.”
Thus, the “Geuro” is born:
Assuming that the Greek government is unable to quickly balance its primary budget, a plausible response of the government to the shortage of euro cash as a result of the end of financial transfers would be to issue debtor notes (IoUs) to its creditors, promising payment as soon as fresh euro cash would become available. As creditors lacking euro cash would have to use the IoUs to settle their own bills, these instruments would assume the role of a parallel currency (let’s call it Geuro).
The Geuro would probably quickly be used in most domestic transactions. For the purchase of essential imports, Geuros would have to be exchanged against euros, most likely at a hefty discount of 50% or more. Since an increasing number of domestic goods, services and wages would be paid in devalued Geuros, the export sector could reduce its prices in euro and regain competitiveness against foreign suppliers. The exchange rate of the Geuro relative to the euro would be determined by the primary budget gap of the government that is being filled by Geuro issuance. Political pressure could build for more prudent policies as Greek residents saw their terms of trade decline.
This plan comes with strings attached: Europe would have to completely take over the Greek banks to avoid even greater capital shortfalls. However, Mayer points out that consensus is quickly building around this idea as necessary for any reasonable stability plan going forward anyways.
So, Greece gets what they need under the “Geuro” plan: a recapitalized banking system and internal devaluation to increase competitiveness and hopefully spur growth.
The icing on the cake is the exit strategy. Mayer:
Greece could formally remain in EMU, execute the exchange rate devaluation necessary to regain international competitiveness, and in the future decide for itself through issuance of Geuros, whether and over what time span it would want to return to a hard currency that is stable against the euro. It could eventually even return completely to the euro by repurchasing Geuros against euros.
Is the Geuro the elegant solution Europe has been waiting for? Troika, are you listening?