Banks made drama out of Greek crisis

Sir, Philip Booth and his co-signatories are right (Letters, August 18). Greece returning to the drachma could happen without the chaos that has often been described and should be envisaged in the scenario they describe: the drachma is introduced while the euro continues being used and becomes a parallel currency, just like in the many countries that have been using parallel currencies for a long time – and just how the euro should have been introduced in Europe in a first stage.

Exactly which commitments within Greece would remain expressed in euros would have to be sorted out, but the existing Greek public debt would remain in euros, and so should various other commitments (maybe most present financial commitments). The Greek state and any citizen with more liabilities than assets in euros would thus be indebted in a currency different from the currency of their main income, but an indebtedness in a foreign currency is nothing unknown either.

The Greek state can indeed be helped in this, and Greek citizens with obvious difficulties also, at a fraction of the cost of the “Grexit” scenarios often mooted, and with all the advantages for Greece of leaving the constraints they cannot cope with. The euro system would lose one full member, but Greece could indeed remain associated, and the message would be very clear that the euro is a currency like any other and that, when a member leaves, its external financial commitments remain in euros, and that a member can leave without the currency itself being affected.

The nightmare scenarios of the euro splitting between various currencies, or between a soft “Club Med” euro and a hard “Hanseatic” one, which is often presented – without being substantiated – would prove useless. The persistence of these scenarios and the lack of formal commitment to a credible crisis-solving scenario ensuring the irrevocable sustainability of the euro, are a major component of the excessive cost of, for example, the Italian debt, as prime minister Mario Monti has repeatedly stressed.

Most southern European countries anyway need to reform their public sector, labour markets and social security financing, much more than they need competitive devaluations. A realistic scenario for a Greek euro exit and debt restructuring has, of course, been needed and possible since the beginning of the Greek crisis, but the banking lobby has preferred to dramatise any solutions involving a debt restructuring. This did limit some losses for some banks, but at a pretty sizeable cost to the economy and banks in general; but such are lobbies.

Eric De Keuleneer, Professor, Solvay Brussels School of Economics, Université Libre de Bruxelles, Belgium

Posted by Eric De Keuleneer at 2:14