Simple solution to the Greece/EU problem

I do think that the resolution to the crisis in Greece and indeed for the EU is strikingly simple and easy. Let's start with Greece as a concrete example:The only thing that needs to be done in Greece is to reintroduce the Drachma as a parallel currency with a floating exchange rate to the Euro and  to 

 "be declared by the government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private" (wikipedia).

The Euro will coexist as a  parallel legal tender so Greece needs not leave the monetary union which would be implying a stigma of failure and the lack of concrete prospect of entering again the union.


The elegance of this solution is its simplicity -  as wages and the prices of local goods will be both in Drachmas they will automatically balance. It is clear that in the beginning the Drachma will depreciate against the Euro. Hence the  wages denominated in Euro will decline but also will  the prices in Euro of the local products, so it will even out and the consumption will not decrease that rapidly but instead will just shift from imported to local products.   This will naturally stimulate the domestic demand for Greek goods and will weaken  the demand for imported ones.

As the wages will be in Drachmas they will become highly competitive when denominated in  Euro which will result in an increase of the Greek exports too.

Combined,  the increased demand for local goods and increased exports will stimulate the economic activity and lead to a decline in the unemployment. And there you have it - no increase in debt for stimulus and sustainable improvement of the Greek economy!


And of course the major advantage is that to implement this solution they really do not need to be given green light by Merkozi,  Horkel and  Obama.  Furthermore, this plan does not bear the   stigma of leaving the euro zone. Just introduce  a parallel  local legal tender.Partly this decision was de facto but not de jure  implemented in Bulgaria and other countries in crisis - local and foreign currency can coexist. The point is that money have different functions like medium of exchange and store of value. Now who says that you should necessarily use the same currency as a medium of exchange and as a store of value. Even as a medium of exchange you can use local currency for transactions between local residents and a foreign currency for transactions between local and foreign agents. You can use yet another, supposedly more stable, currency as a store of value.   So if the liquidity is problem introduce a new local currency as a local medium for exchange but keep the "good old" Euro as well.   I think the solution is viable because it has been invented by the market and not by  some bureaucrat in Brussels. The only remaining step to accomplish  is to legalize  it and put it in a proper legal framework.

Pls, do not get me wrong. I do not believe I have invented this. I just spell out something what is and has been happening in the market place.  

There is probably a minor technical problem with having two parallel currencies  that they both  "must be accepted as a form of payment within the boundaries of the country" so if you are in a situation that both contracting agents want a different settlement currency you have to clearly regulate which one has the priority. That is actually not a great issue - either the agents agree on a common currency or if they don't you will legally define in which situation which currency has the right to be enforced. For example if both contractors are subject to the local jurisdiction and the contracting amount is less than say 1mil. Euros then the Drachma is the default currency, that never the less can be renegotiated if both parties agree on this.  For all other cases the Euro is the default currency. This of course is just an example.