What a New Currency Would Mean for Greece

May 29, 2012 Updated: October 1, 2015
People walk past a monument featuring a replica of the last edition of the Greek currency, the drachma
People walk past a monument featuring a replica of the last edition of the Greek currency, the drachma, in the center of Athens in February. If Greek voters decide to leave the euro currency, it would mean a return to the drachma. (ARIS MESSINIS/AFP/Getty Images)



MUNICH—All eyes are on Greece’s next election on June 17, which will determine the future of Greece continuing as a member of the Eurozone—and thereby use of the euro currency—or go back to using its old currency, the drachma.

The new government could either be pro-euro, and enforce the austerity measures, or just as likely, not put up with radical budget cuts and try to renegotiate the reforms and austerity measures with a softer tone.

Recent polls showed a rise in support for the pro-euro New Democracy party, but experts have cautioned against following these polls too closely, as Greek voters appear to be changing their minds on a daily basis and the elections are still weeks away.

The question becomes, then, will Europe be willing to accept any relaxation of the austerity measures that were negotiated under the previous Greek government? It could come down to a battle between France and Germany to either promote growth or stringent savings for Greece. Germany would take the side of austerity measures and tough discipline, while France, under its new president, will push for more spending and loans to stimulate growth.

“We want Greece to stay in the euro, but we insist that Greece sticks to commitments that it has agreed to,” German Chancellor Angela Merkel told reporters last week.

New French president Francois Hollande is of another opinion. “The idea is to put energy into the growth motor. All the member countries don’t necessarily share my ideas. But a certain number expressed themselves in the same direction,” Hollande said.

In case Europe doesn’t accept anything other than strict austerity measures, Greece will not receive the second half of its 145-billion-euro (US$185 billion) bailout loan from the European Financial Stability Facility (EFSF) and the remaining 26 billion euros (US$32.6 billion) from the International Monetary Fund (IMF) that Greece is due to receive in installments by 2016.

As a result, Greece would not be able to pay its upcoming bond obligations to its creditors this year and the country’s banks would collapse. This in turn, would make it impossible for Greece to continue operating in the euro currency, as the European Central Bank or other financial institutions would not lend any more money to Greek banks.

This way, Greece would be forced to start printing its own currency, a.k.a. temporary IOUs, to pay the loans and to finance all of its economy. This new currency would convert all the previous euro prices for everything into the new drachma currency, which would completely replace the euro.

The risk of the drachma is that in a very short time it could lose its value by more than a half, thereby causing the external loans to rise to astronomical heights and the new currency could be worth less than the paper it is printed on. In the worst-case scenario, Greece could enter complete bankruptcy, as the country would be left with no currency at all to pay its creditors and sustain its economy.

In the rosier case that the drachma did not get devalued too severely, Greece could theoretically only benefit from tourism, as it doesn’t have any other significant exports. It would be cheap for foreigners to spend their vacations in Greece and pay in drachma. However, facing total instability, it is hard to imagine that many tourists would be able to “relax” during their vacation in Greece.

“Without any real heavy industry, the Greek economy can’t exploit this advantage [devalued drachma],” said Constantine Michalos, president of Athens Chamber of Commerce and Industry. “Our main industry is tourism, but in a chaotic situation, which tourist would choose to come to Greece right after the country goes back to the drachma?”

On the flipside, there are even a few Greeks who feel that things may not be that bad with a return to the drachma, and it might simply mean the start of a new lifestyle, the same thing that people did to survive for thousands of years.

“The way things are now, it can’t get any worse,” said Tasos Schinas, a 37-year-old living in Athens, to the Business News newspaper. “Sure, the transition to the drachma will be difficult [but] average people will find a way to survive, many will probably go back to the village and start growing produce. … We just won’t go back to the lifestyle we’ve led all this time.”

Now, the clock is ticking away until June 17 to determine what the new government will be and which direction it will follow.

“It is now up to the Greek parties, the Greek politicians and the Greek voters to choose which path they want to take,” said a German official from Chancellor Angela Merkel’s office.

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