There won't be Drachma

12 June 2012
Greece goes to the polls again next sunday, in what is billed as possibly the last major milestone on Greece leaving the Euro. If leaving the Euro and re-adopting the Drachma are considered hand-in-hand, then i do not believe it will happen.

Most of the people who are arguing in favour of Grexit (Greece exit from the Euro) are those who, for idealogical reasons, are wishing for a total Euro break-up. While there are many valid arguments against the Euro, it is wrong to blame the Euro for the problem. I don't believe Greece will replace the Euro with the Drachma, because it will simply make things worse rather than better. Just the prospect of a Euro exit is the main driver behind the ongoing Greek bank run.

The problem is that Greece does not really have much of an export industry. Tourism is often flagged up, but leaving aside the issues of an unstable currency leading to the reputation of an unstable country, I doubt the Drachma would help tourism much anyway. Tourists who do not want to mess around with currency exchanges will go to Italy, and for those who are only interested in cost it would be a price war with Turkey. Competitive devaluation is not a particularly useful tactic when everywhere is in economic difficulty, and in the case of Greece any gains from devaluation would be insignificant compared to external balance of payment problems. EU bail-outs are the nearest thing to borrowing that Greece has left, and no-one in their right mind would agree to any borrowing denominated in Drachma.

Greece's biggest problem at the moment is the ongoing bank run, and that will only end when Greeks think their Euros are safe. The only way i can foresee that happening is Greek banks being taken over by non-Greek banks, with the provision that Greek deposits are nominally kept outside Greece. Of course it won't happen, as on-demand transnational free flow of liquidity is a libertarians' dream, and hence most bureaucrats' worst nightmare.