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31 May 2012

The German banker's cunning plan

Question: What are the first three letters of the Greek alphabet?

Answer: I, O, U.

Actually, there’s a point to this bad joke, which is that promissory notes – issued by the Greek government – could  enable a compromise between a potentially calamitous Greek exit from the Eurozone and the unsustainable status quo.

This intriguing suggestion comes from Thomas Mayer – chief economist at Deutsche Bank – and is reported in Die Welt (via the Worldcrunch website):

  • “Mayer and his colleagues at Deutsche Bank have come up with a third option: introduce a brand-new second currency, alongside the euro, in Greece.
  • “‘The Greek government is soon going to be issuing IOUs to state workers,’ Mayer said at the Welt conference. ‘There’s going to be a parallel circulation of promissory notes and euros.’ And he’s already come up with a snappy term for the new parallel currency: the ‘Geuro.’
  • “‘I believe that the most probable development will be a currency that circulates parallel to the euro,’ he said. This would for example make it possible for exporting firms to lower salaries so that they can do business again. And it would make it possible for a bankrupt government to honour its commitments.”

The parallel currency would likely trade at a massive discount to the Euro, but then that’s the point – anything that could be paid for in Greek government IOUs would become much more affordable to outsiders (correspondingly, anything that has to be paid for in Euros would become much less affordable to Greeks – including the Euro-denominated debt that they owe).

You might think that there’s not much difference between this plan and the Grexit scenario in which Greece devalues by returning to the Drachma – and in several key respects you’d be right: This whole crisis is the result of a series of fundamental economic imbalances that can’t be resolved without somebody, somewhere paying the price.

What the Mayer plan does do, however, is minimise the pain for Germany: First and foremost, there is no formal Greek exit from the Eurozone – thereby leaving the world’s biggest can of worms unopened. Yet the Germans wouldn’t have to subsidise Greek domestic spending anymore, because instead of running a deficit (with which they need outside help), the Greek government would be running a printing press churning out IOUs. Obviously, there’d still be a real price to be paid – but this would fall upon the Greek people, left holding paper eaten away by inflation and devaluation.

Obviously, the Germans would, as in any other likely scenario, have to prop up a banking system exposed to Greek debt. But with the Greeks still members of the Eurozone, maximum pressure could be maintained for some form of repayment.

So, all in all, the least worst option for Germany.


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