Saving Greece and the Eurozone

As Greece heads towards probable exit from the euro, I read pages and pages about the dire consequences but little or nothing about the mechanism for exit, which must surely be the key to minimising chaos and global disruption. Below I make a proposal, perhaps not the best, but at least an attempt to make a constructive contribution to our salvation.  Hopefully others will refine it with their comments.

In brief, all euro debts and savings would remain in euros, so no need for Greeks and others to make panic withdrawals. All wages would be denominated and paid in Drachma from end July (or whenever), at the rate of 1 drachma per euro for arithmetic and presentational convenience.  From the same date all prices would be denominated in drachma by law and for a settling in period of perhaps 2 months, payment would be acceptable either in drachma or in euros but not at a euro rate of less than 1 per drachma, otherwise confusion would reign.

There seems to be a view that the drachma would fairly rapidly if not instantly decline in value to about half a euro. I would permit this and allow free exchange between the currencies.  This would slash Greek manpower cost relative to the rest of the Eurozone stimulating export led growth, just in time for the tourist season. It would also encourage shoppers and shopkeepers to hang on to their euros and trade in drachma.

The banks would create a new drachma account alongside every current account and likewise credit card companies etc. so plastic trading could continue seamlessly in the new currency.  Physical paper money could be created quickly by minting euros and defacing them with an overprinted D, and probably some perforations to stop counterfeiters turning them back to euros. The Greek government would then sell these to the banks in exchange for euros (at the going rate), for distribution via existing cash machines etc.

There is also the issue of ongoing euro denominated contracts, commercial and household. I would suggest that contracts with foreign organisations remain in euros but that internal contracts be switched by default to drachma.  During the settling in period the seller would have the option of retaining the euro price so long as the buyer was allowed to renegotiate a drachma price or switch supplier without penalty. Clearly some prices such as fuel and power are largely determined by import prices and will surge in drachma as the currency devalues; so what’s new?

What about the homeowner with a mortgage?  Well, he was in terrible trouble anyway because his interest rate in euros was climbing, his house value was collapsing and he was about to lose his job perhaps.  When he defaults on his loan and is repossessed by the bank they will no doubt only be able to sell at a very much reduced price.  But at least the Greek government can now keep the Greek banks solvent by pumping in drachma.  And perhaps our dispossessed homeowner can buy his own home back at a fraction of what he owed before with a drachma loan, albeit at a high interest rate. Homelessness is ultimately due to a mismatch between the number of households and the number of houses not the finances.

But I hear the squeals of the well-heeled bankers who will still be owed money by Greece and the Greeks and think that German taxpayers should be made liable.  I think it is time they started taking responsibility for their own actions and putting less money in their own pockets.