De-Lurking on the Net

May 15, 2012

Time is ripe to introduce New Greek Euro or Drachma

Greece Euro Maelstrom

Greek Euro Notes

When is the right time for any country trapped with high unemployment, imminent default on loan to introduce a parallel currency. Some feel it is often after a default and super inflation a country becomes ready to launch a new currency. I think time is ripe now for Greece to introduce a parallel currency. It will allow to avert a disaster gathering pace not only in Greece but the weak economies of Europe which are gradually drifting towards precipice.

Greek Economic Data – Unemployment, Inflation etc

The last unemployment figures from Greece was 21.7% in Mar 2012. The inflation in May 2012 is very less and welcome 1.9. However, the economy is contracting since July 2008, but  the exports have seen some growth since Jan 2001 almost doubling from 800 million Euros to 1700 Million Euros in last quarter. What is important, however,  is the Greece’s Current Account to GDP figures. It is all negative every quarter at least since Jan 2000. The figures every quarter range from -5.8 to -14.7 % of GDP. This figure provides an indication on the level of international competitiveness of a country. Usually, countries recording a strong current account surplus have an economy heavily dependent on exports revenues, with high savings ratings but weak domestic demand. On the other hand, countries recording a current account deficit as negative as Greece is have strong imports, a low saving rates and high personal consumption rates as a percentage of disposable incomes. Greece industrial production figures have plummeted since Jan 2008 averaging about minus 10%. So, it is very surprising to see the exports rising and a very low inflation. The Figures sometimes do not reveal enough info. But one thing is certain that Greece’s balance of Trade has been negative since Jan 2002 ranging from 1500 million Euros to 2400 million Euros in January 2012. The balance of trade peaked negatively around Jan 2008 when it became over 4000 million Euros a quarter. Perhaps, the balance of trade is improving lately as it is becoming less negative but it remains unclear if this improvement can continue and default is not on the cards. Though, at last annual figures the imports were 4081.00 million Euros and exports were 1744.00 million Euros giving negative balance of trade 2338.00 million Euros.

Two Greek Euro Coin

Greek Economic Situation

There was a report recently on a BBC news item that many small companies have started moving to nearby counties already. One such company shown in that report moved their business to Bulgaria. Greece, meanwhile, appears on the verge of a bank run: Depositors withdrew some €700 million on May 14, and the Central Bank warned the situation could worsen. The fear is of further exodus of industries and the capital. The default is looming in June 2012 itself when a new payment becomes due on the bonds and the country will have to raise new capital for servicing the existing debt.

Solution For Greeks – A Parallel Currency?

The best approach is to stay the course on euro loans and raise the capital as and when it is needed but also to introduce a parallel currency immediately backed by either gold, some hard assets or the Euros. A new greek Euro or a new drachma now will encourage local employment .The confidence loss in the new currency will be profound if it is introduced as a result of being forced and driven out from Euro. But an introduction now of a parallel currency will also usher reduced economic dependence and higher self-reliance and stop the capital flight and a super inflation following a default and forced currency introduction. A new Drachma or Greek Euro now can also create the international trade and employment e.g. it can replace the imports with the new locally generated goods straight away and of course in longer run, it can find some exports also beyond Greece ‘s shore, so employment will only increase by launching a new drachma. Of course tourists will keep generating local employment as well as provide much-needed foreign currencies which can be used as now for debt servicing.

But tourism depends on the absence of chaos. Rather than replacing the currently used Euros with the parallel currency fully in one go following a default, consumers will trade using a portion of the parallel currency in combination with Euros, therefore producers taking part in the parallel currency system will not be insulated from outside competition totally and products should not become expensive following such an introduction now, though some insulation will start creeping in raising employment or bigger economic activity. Prediction of 70% to 80% fall in new Drachma is getting predicted. Wherever  the new additional currency falls up to,  it will avert the bigger economic instability and political, social unrest and pain for all, if  it is introduced before a default than after one.

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