If Greece fails to get a grip on its finances, the country could be forced to issue a parallel currency - all while officially remaining in the eurozone. Is it time to revisit the idea of a "geuro?"
Grexit: Greece abandoning the euro. It's a scenario that has been discussed for years. But recently, it's been getting more public attention, as the managers of the euro crisis become unnerved by the tactical moves of the Greek government, spearheaded by Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis.
The question keeping officials up nights is: How do they avoid the unplanned and uncontrolled exit of Greece from the common currency, which has been dubbed "Grexident," without having to transfer many more billions of euros to Athens for years to come?
Introducing a parallel currency in Greece could be an answer. Three years ago, Thomas Mayer was one of several economists who proposed this solution. Mayer, who was Deutsche Bank's chief economist back then, suggested creating the "geuro," a currency that would be used to meet the government's financial obligations within Greece.
"Based on the latest opinion polls, the Greek election could result in a highly confused outcome, with the new government being unable or unwilling to meet any budgetary terms acceptable to the Troika, but also unwilling to leave the euro voluntarily," Mayer wrote three years ago.
It took the Greek drama longer to materialize than Mayer had anticipated, but his words were prescient in light of events since Alexis Tsipras' election victory in late January of this year.
"The path of least resistance could be a stop to financial assistance to the Greek government, and the continuation of payments for debt service and the stabilization of the Greek banks in a European Bad Bank," Mayer wrote in a 2010 research paper titled "The Geuro: A parallel currency for Greece?".
"In this case, a Greek parallel currency to the euro (which we dub the "Geuro") could emerge when the government issues IOUs to meet current payment obligations," Mayer wrote.
New drachma, or "geuro"?
Greece could still, with the help of its EU creditors, pay its sovereign debt in euros and stay in the euro group.
But by introducting a new domestic parallel currency, which would quickly drop in value compared to the euro, the country would be able to boost its competitive edge, stimulate exports, and kick-start the tourism industry - without being forced to leave the European single currency.
Later on, Mayer concludes, Greek authorities could stabilize the exchange rate of its parallel currency with prudent fiscal policy and structural reforms, keeping the door open for a full return to the euro family when conditions are ripe.
Since Mayer put forward his proposal in 2010, more and more financial pundits have come to agree that a parallel currency is a good idea for Greece. The German business daily "Handelsblatt" has quoted the president of the German Institute for Economic Research (DIW), Marcel Fratzscher; DZ Bank's chief economist, Stefan Bielmeier; and the director of the Cologne Institute for Economic Research (IW), Michael Hüther, as experts who think the introduction of a parallel currency in Greece could be one of the outcomes of the Greek debt crisis.
Support from a Nobel Prize laureate
Christofer Pissarides, a Greek Cypriot economist, was awarded the Swedish Central Bank's Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2010.
In an interview with Greek television channel NERIT last week, Pissarides supported the idea of introducing a parallel currency in order to keep the country in the eurozone. He admitted that the measure would be a "less-than-ideal solution," one to be utilized in the event the Greek government could not meet wage and pension obligations in the near future.
"Greece could issue a certain type of security that could evolve into a new parallel currency," Pissarides was quoted as saying by the German Press Agency (dpa). Born in Cyprus into a Greek-Cypriot family, Pissarides has been teaching labor market economics at the London School of Economics since 1976.
While talks between international creditors and the Greek government are still underway, the European Central Bank (ECB) is keeping Greek banks alive with short term Emergency Liquidity Assistance (ELA).
In the last three months, Greek bank customers have withdrawn an estimated 20 billion euros ($21.6 billion) from their accounts.