BERLIN – Thomas Mayer is one of the highest-profile economists in Germany. Deutsche Bank’s chief economist explains the euro crisis so clearly that anyone can understand all the moving parts. He calls a spade a spade, and tells the German taxpayers what the risks are. He also thinks outside the box.
And he just proved it again at the Welt Group and Stiftung Familienunternehmen (Family Business Foundation) conference on currencies — a subject that has been preoccupying politicians and economists for months. The hot topic was: should Greece stay in the euro or re-introduce the drachma?
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.”
A parallel currency
“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 honor its commitments.
“It’s not likely that Greece will formally leave the euro, or that other euro countries will turn away from Greece completely,” the Deutsche Bank economists write in their report.
The “path of least resistance” could, following electoral victory of radicals in Athens, mean stopping payments for running budget expenses and only paying money Greece needs to service its debts. And if that were to happen, “there could be a parallel currency to the euro,” the study says.
According to Mayer, Athens could kill two birds with one stone by handing out IOUs . On the one hand, a departure from the euro could be avoided. On the other hand, a de facto adjustment of the exchange rate would become possible. “At first, the result could be massive devaluation,” says Mayer, but the government could then stabilize the country with structural reforms thus keeping the door open for a complete return to the euro.
A European-led “Bad Bank”
However, even with this scenario Greece could only survive economically if failed Greek banks were turned into a European-managed “Bad Bank.”
This would enable them to claim funds from the European Financial Stability Facility (EFSF) and thus to recapitalize.
According to the German economists, that maneuver could lead to new confidence on the part of many scared account holders who would return the savings they withdrew from the banks when the possibility of a departure from the euro loomed.
The creation of such a Bad Bank “would of course be costly,” Mayer says, “but it would also reveal the true state of the economy” something that has been veiled by the European bailout funds and Central Bank intervention.
Greek banks are presently in large part dependent on emergency loans from its Central Bank. Many institutions are not eligible to receive funds from the European Central Bank because they don’t have enough capital and aren’t considered solid. According to Welt research, the volume of emergency loans in Greece now amounts to at least 75 billion euros.
The more Greeks close their bank accounts, the higher this amount climbs because the Central Bank is providing the missing resources to prevent banks from going under — but it also means that the Bank is also presently financing further flight of capital from Greece.
Read the article in German in Die Welt.
Photo – dullhunk