Greece considering to implement a new currency

[shran]

http://www.spiegel.de/international/eur ... 01,00.html

Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.

'Considerable Devaluation'

Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy.

"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.

In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.

Banks at Risk

Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency "would consume the entire capital base of the banking system and the country's banks would be abruptly insolvent." Banks outside of Greece would suffer as well. "Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts," the paper reads.

The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to "write down a significant portion of its claims as irrecoverable." In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) "Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads.

In short, a Greek withdrawal from the euro zone and an ensuing national default would be expensive for euro-zone countries and their taxpayers. Together with the International Monetary Fund, the EU member states have already pledged €110 billion ($159.5 billion) in aid to Athens -- half of which has already been paid out.

"Should the country become insolvent," the paper reads, "euro-zone countries would have to renounce a portion of their claims."

[Mikey]

Question: even if Greece's proprietary currency doesn't become devalued simply by the change (which it most definitely will,) how exactly does Papendreou think this will help? You can switch currency all you want, but changing it doesn't create any money.

[Captain Seafort]

Question: even if Greece's proprietary currency doesn't become devalued simply by the change (which it most definitely will,) how exactly does Papendreou think this will help? You can switch currency all you want, but changing it doesn't create any money.

It'll at least allow them to set their own interest rates, and allow the value of the currency to vary depending on the Greek economy rather than the wider European one. Whether that'll do any good is another matter.

[Mikey]

If I were Greece, I think I'd rather tie my valuation to Europe at large. Valuing it solely according to the Greek economic situation is walking a very narrow tightrope over a deep gorge of possible catastrophic inflation.

[Graham Kennedy]

Excellent news.

There's a concerted political effort to create a European superstate. They know most of the people don't want it so they've spent decades pushing it forward a little at a time, each step just small enough that people are barely willing to accept it.

Anything that gives that process a kick is more than welcome IMHO.

[Atekimogus]

Ah well, they should leave the EU altogether and good ridance, hopefully they will take Portugal, Spain and Italy with them as well.

I am all for the grand european idea, helping each other and happy merrymaking but - although I should probably know better - I am sick to death of those semi-criminal states not being able to get their budgets in line and expecting others to pay their debts.
As always it is not the people living there but their corrupt government but honestly, it is hard to feel sorry for them after decades of paying the EU with no benifit whatsoever in return.

Rant being almost offer now , they are still way better of with the EU than without and they know it. This is nothing more than a smokescreen to lower interest on debt, or maybe they want still more money or whatever and nothing more. Maybe they are afraid that since Portugal was granted certain guarantees that there isn't enough german money left for them when the shit hit the fan or whatever.

Seriously, if I were the EU I would grant those countries only financial aid if - in turn - they hand over their accounts to competent people from Germany, Luxembourg or Austria, basically folks who have at least a grasp of accounting and where cooking books is the exception and not the norm.

There's a concerted political effort to create a European superstate. They know most of the people don't want it so they've spent decades pushing it forward a little at a time, each step just small enough that people are barely willing to accept it.

Anything that gives that process a kick is more than welcome IMHO.

I agree! I love the idea of an economical unity, traveling where I please within Europe, even a common currency is somewhat practical and the four freedoms of the EU are great but WHY on earth would I want a United States of Europe?

[Mikey]

I am all for the grand european idea, helping each other and happy merrymaking but - although I should probably know better - I am sick to death of those semi-criminal states not being able to get their budgets in line and expecting others to pay their debts.

Being a member of an economic confederacy =/= getting others to pay your debts. The banks of the member nations may be under political pressure to settle Greek debt at about 60 - 80% - and member nations to whom Greece is indebted may be tasked with extending and altering their terms, lines and limits - but that's not the same as assuming Greek debt.

Excellent news.

There's a concerted political effort to create a European superstate. They know most of the people don't want it so they've spent decades pushing it forward a little at a time, each step just small enough that people are barely willing to accept it.

Anything that gives that process a kick is more than welcome IMHO.

TBH, I really can't believe you guys didn't raise more of an anti-EU hue and cry when they tried to strongarm Ireland into ignoring its own popular vote... er, how many times in a row, was it? As an American observer, my understanding is that the EU was initially to be an economic union; however, under the reign of Sarkozy I, it has (both covertly, and not so much) attempted to transform itself into a political hegemony... with, I must say, and amazing degree of acceptance by the European public.

[Captain Seafort]

TBH, I really can't believe you guys didn't raise more of an anti-EU hue and cry when they tried to strongarm Ireland into ignoring its own popular vote... er, how many times in a row, was it?

They don't usually have to ask the Irish more than twice, but they've done that at least a couple of times, and the second of those was basically a retread of the treaty the French and Dutch took exception to.

As an American observer, my understanding is that the EU was initially to be an economic union

That's how it was initially sold - there's always been an intention to try and create a United States of Europe.

under the reign of Sarkozy I, it has (both covertly, and not so much) attempted to transform itself into a political hegemony

Sarkozy, by French standards, is virulently anti-EU. If you want to see what real French Europhillia is, have a look at Valéry Giscard d'Estaing.

[Graham Kennedy]

There's a lot of issues at work; in the UK, it's generally the case that elections are decided on domestic issues rather than foreign ones. So even though most people are fairly anti-Europe, they are willing to elect pro-Europe governments so long as they get the tax/spending policies they want from them.

People here are also rather less interested in the principles of government than they seem to be in the US. I imagine if the US government decided to adopt the Peso as its national currency, for instance, there'd be a colossal political shitstorm about it. Whilst the idea of converting to the Euro is not popular here, a lot of people do like it... purely on the basis that they wouldn't have to change currencies when they went on holiday. Seriously, that's one of the major arguments put forward for adopting the Euro; it would save them ten minutes at the airport and make prices easier to understand abroad.

The idea of losing control over a major part of our own economy just doesn't seem to bother them since in their view it wouldn't impact directly on their day to day life.

[Atekimogus]

Whilst the idea of converting to the Euro is not popular here, a lot of people do like it... purely on the basis that they wouldn't have to change currencies when they went on holiday. Seriously, that's one of the major arguments put forward for adopting the Euro; it would save them ten minutes at the airport and make prices easier to understand abroad.

The idea of losing control over a major part of our own economy just doesn't seem to bother them since in their view it wouldn't impact directly on their day to day life.

Well, having it more convinient on holidays is certainly not a good argument but on the whole the EURO is not a "bad" idea. Like many things in the EU it started as a fairly good idea and got completly blown out of proportion.

For instance, there where already countries prior to the euro with highly connected currencies like germany and austria. They have roughly the same debt, the same inflation, both had have good experience with extremly hard currencies and sharing one currency almost changes nothing (The Schilling was always pegged closly to the Deutsche Mark) except promoting trade between them and making the currency stronger vis a vis other currencies (which might and might not be a good thing).

So, there is nothing wrong with having one currency for economies who behave and are similar. But then they started the clusterfuck with the mediteranian countries and naivly thought they could strongarm them into keeping their economy under control and on par with western/middle-european standards, hence the convergence criteria every country had to fulfill (which weren't a bad idea, like most things with the EU). Problem is, it's just now that they figure out that countries like greece should have NEVER been allowed to adopt the EURO because they blatantly cooked their books to fulfil said criteria, oops, how embarassing.

What a nice instance of French, German arrogance to think they can just come up with a set of rules (no matter how sensible and well thought out) and expect countries - who historically have behaved completly differently (high inflation instead of hard currency for example) to follow those rules

In short, the euro does make economical sense but only for economies behaving similar and reacting similar to shocks. There should have been western/central europe EURO zone, a mediteranian EURO zone and a eastern european EURO zone each with their own central bank able to react to economical shocks according to their region. Forcing one currency on two completly different economical systems gimps both.

[Graham Kennedy]

Well, having it more convinient on holidays is certainly not a good argument but on the whole the EURO is not a "bad" idea.

Well on that point we disagree.

For instance, there where already countries prior to the euro with highly connected currencies like germany and austria. They have roughly the same debt, the same inflation, both had have good experience with extremly hard currencies and sharing one currency almost changes nothing (The Schilling was always pegged closly to the Deutsche Mark) except promoting trade between them and making the currency stronger vis a vis other currencies (which might and might not be a good thing).

So, there is nothing wrong with having one currency for economies who behave and are similar.

I've no objection to pegging one currency to another; as you say, if the economic conditions in both countries allow it, then why not? But the thing is that pegging can be easily undone. If the economic conditions change and make it a bad idea the government simply has to make the decision not to peg one currency to the other, and that's it, it's done.

Switching to a whole different currency is much harder and less practical. So the net result is that even when the conditions change to make a common currency a bad idea, governments keep it anyway - and thus damage their own economy.

But then they started the clusterfuck with the mediteranian countries and naivly thought they could strongarm them into keeping their economy under control and on par with western/middle-european standards, hence the convergence criteria every country had to fulfill (which weren't a bad idea, like most things with the EU). Problem is, it's just now that they figure out that countries like greece should have NEVER been allowed to adopt the EURO because they blatantly cooked their books to fulfil said criteria, oops, how embarassing.

Things like this are inevitable with the EU; nothing about it derives from what people want or what is sensible precisely because from day one it's been something the authorities push onto people. It's a top down authoritarian system which is based on political compromise and backdoor dealing, because that attitude is built in right from the start. It contrasts very sharply with the US, say, which whilst it isn't perfect it works, and works well, because the people who created it set out with basic principles that people wanted, and built up from there.

[Atekimogus]

Things like this are inevitable with the EU; nothing about it derives from what people want or what is sensible precisely because from day one it's been something the authorities push onto people. It's a top down authoritarian system which is based on political compromise and backdoor dealing, because that attitude is built in right from the start. It contrasts very sharply with the US, say, which whilst it isn't perfect it works, and works well, because the people who created it set out with basic principles that people wanted, and built up from there.

I cannot disagree with you on this. I really wish I could because I do think that the EU - when done right - is not a bad idea and there are certain eras where it actually has done something good when their main concern was still to boost the economy and not trying to create a political union. Living in Vienna for example, it is simply wonderful that you can take nowadays a one hour train-trip to Budapest, getting lunch in Prague and be back for evning coffee in Vienna with no problems whatsoever. (Ok, that would be a bit stressfull but you get the point). Something you couldn't do only a few years ago.

So the free movement of goods, services, capital and people certainly made live a hell of a lot easier. (At least living in central europe with the next neighbor country only a few car-hours away at the most) Altough I admit I have no idea how much of it is felt by the people living on the British Isles since I have no idea how often they visit the continent. (What are the ticket prices to france for example if you take the tunnel? I would imagine that it's something you don't do very often)

[Graham Kennedy]

Personally I don't, no. I've only been to Europe twice. Train tickets to cross the channel run around £70, which is certainly a sizeable chunk of change.

[BigJKU316]

Things like this are inevitable with the EU; nothing about it derives from what people want or what is sensible precisely because from day one it's been something the authorities push onto people. It's a top down authoritarian system which is based on political compromise and backdoor dealing, because that attitude is built in right from the start. It contrasts very sharply with the US, say, which whilst it isn't perfect it works, and works well, because the people who created it set out with basic principles that people wanted, and built up from there.

I think this is pretty spot on in regards to the EU. What started as a pretty good set of ideas for economic cooperation has expanded, I think in part, as political leaders of formerly very important nations found themselves talked over to a large degree in the last quarter of the 20th century. These are nations with very different cultures, of which some nations are particularly protective, who had every reason in the world to cooperate economically but really no reason at all to form a political union of the type the elites seem to be pushing. I think this has been shown as the EU has attempted to move beyond the Euro in many ways. The inability to agree on certain cooperative defense measures and other things has really kind of left the organization stranded in my view.

So, there is nothing wrong with having one currency for economies who behave and are similar. But then they started the clusterfuck with the mediteranian countries and naivly thought they could strongarm them into keeping their economy under control and on par with western/middle-european standards, hence the convergence criteria every country had to fulfill (which weren't a bad idea, like most things with the EU). Problem is, it's just now that they figure out that countries like greece should have NEVER been allowed to adopt the EURO because they blatantly cooked their books to fulfil said criteria, oops, how embarassing.

I think that things with Greece are small potatoes compared to what will happen someday with Germany and France over monetary policy. Those two nations were not all that similar in monetary policy when the Euro was formed. The real risk is what happens if an event impacts one of those economies and not the other. That will blow the Euro apart very quickly.

[Graham Kennedy]

What a place like America has that Europe doesn't is national identity.

No doubt there are economic changes in the US that hit some states hard but benefit others. But it doesn't occur to the people of California to think of the rest of the US as "those people" in the same way that a Brit thinks of France or Italy. And an American living in California could move to Texas, say, pretty easily. He knows there will be differences, sure, but he also knows there will be the same language, much the same public services, largely similar laws, the same rights and freedoms. He knows he will still be able to eat his favourite food, read his favourite newspaper, watch his favourite TV show, see the same sports, vote for the same political parties who will stand on the same issues (at least for national elections). There's a thousand reasons why a Californian would think of Texans as part of the people he calls "us" - in comparison, the differences that make Texans "them" are minor.

It's a very, very different thing when I go to Italy. Different language, different currency, different laws, different customs, different politics, and on and on. People in the UK really don't think of people in France or Italy or Germany as "us" at all. And no attempt to push us into thinking that way is ever going to work.