Whispers of Return to Drachma Grow Louder in Greek Crisis
The political upheaval in Athens has suddenly made the once unspeakable — Greek debt default — a distinct possibility.
So now it is time to ponder the once unthinkable: that Greece might end its 10-year use of the euro and return to its former currency, the drachma.
Such a move is still officially anathema in Athens. But a growing body of economists argues that it would be the best course, whatever the near-term financial and economic implications. And now, with a referendum on the European-led bailout facing Greek voters, a vocal minority that has long called for a return to the drachma might find itself with a growing group of listeners
A return to the drachma is unlikely to offer a quick cure for Greece’s ills. Default on the nation’s $500 billion in public debt would become a certainty, depositors would take their money out of local banks and, with a sharp devaluation of as much as 50 percent, inflation would loom. A return to the international credit markets would take years.
But drachma defenders contend that these worst fears are overdone. Yes, there would be disruption and panic initially. But, they say, pointing to Argentina’s case when it broke its peg with the dollar in 2002, the export boom ignited by a cheaper currency and the ability to control the drachma would eventually work in Greece’s favor.
“The real problem is that we are operating under a foreign currency,” Vasilis Serafeimakis, a senior executive at Avinoil, one of Greece’s largest oil and gas distribution companies, said of the euro. In the last year, he has been banging the bring-back-the-drachma drum.
“If we had our own currency, we could at least print money,” Mr. Serafeimakis said, referring to the ability to revalue the drachma. “And what is the worst thing that happens if we do this? I don’t get a Christmas gift from one of my bankers.”
His voice is still a lonely one.
According to a recent poll in the Greek newspaper Kathimerini, 66 percent of Greeks believe that returning to the drachma would be bad. But proponents of a euro exit say that beneath the surface, more Greeks are beginning to question the euro.
“The view that Greece should exit the euro is more widespread than you would think,” said Costas Lapavitsas, a Greek economist at the University of London who has long pressed for a return to the drachma. “It is just that the opposing view is so dominant.”
Until now, many Greeks have been wedded to a European identity forged by a national embrace of the euro and the wealth that, for a time, came along with it. Talk of returning to the drachma had mainly been held up as an apocalyptic vision rather than a viable policy option.
But for a growing number of Greeks, the collapse of their economy is apocalypse enough.
Prime Minister George A. Papandreou threw down the gauntlet to the Greek people Monday when he surprised the world by announcing a referendum on the latest bailout plan. But it was his finance minister, Evangelos Venizelos, who that same day put a finer point on the question.
“Are we for Europe, the euro zone and the euro?” he asked. Or, he continued, does Greece return to the drachma?
Under the latest bailout plan from Europe, Greek debt held by private institutions would be written down by 50 percent. In return, as long as Greece stayed on track carrying out painful austerity measures through 2015, Athens would continue to receive more bailout money to finance its remaining debt.
When Mr. Papandreou brought that tentative deal back from Brussels last week, the escalated protests and rioting on Greek streets were a sign that it was not something his people would easily stand for.
Supporters of a return to the drachma note that the severe budget cuts of the last two years had resulted in almost closing the budget deficit — as long as interest payments on its debt are not counted.
Stripping out interest payments, Greece is expected to register a budget surplus next year of 1.5 percent of its gross domestic product (compared with a budget deficit of 8 percent of G.D.P., when interest is counted), and that, in effect, would give it the freedom to stop paying its debts.
It is an argument for defaulting on the debt and starting over, in other words. That sense of reborn autonomy is what lies behind the drachma movement that Mr. Serafeimakis is promoting.
For more than a year, he has been educating himself about the euro. He has pestered economists and written passionate posts on obscure blogs, convinced that the benefits from a devaluation of Greek’s currency, while no doubt painful, would result in a return to growth more quickly than further wage cuts and layoffs.
Outside the country, meantime, many prominent voices have argued for more than a year that it is impossible for Greece to regain competitiveness while clinging to the euro currency. They include prominent economists like Nouriel Roubini, Kenneth S. Rogoff and Martin Feldstein, as well as the investor George Soros.
Now, a small but growing band of Greek economists, none of them very well known, is beginning to ask the same question: namely, whether the benefit of having a cheap currency under Greek control would outweigh the costs of defaulting on its debt and abandoning the euro.
In a recent paper, Stergios Skaperdas, a Greek economist at the University of California, Irvine, argued that a cheaper drachma would stem imports, bolster exports and, crucially, give Greece the flexibility to control its own monetary policy and ease the effects of fiscal retrenchment.
Mr. Skaperdas conceded that getting this view across remained a difficult one as many Greeks found it troubling to accept that their euro dream might be over.
“For most Greeks, including economists, adopting the euro was like marrying a dream spouse — beautiful, intelligent, caring, even rich,” he said. “And then, rather suddenly, the marriage turned into a nightmare.”
A euro divorce would carry substantial costs, most profoundly an immediate run on Greek banks. That is why mainstream Greek economists insist that there will be no such outcome.
“There is no way that Greece leaves the euro — this will take us back many years,” said Yannis Stournaras, an influential economist in Athens who has advised past governments. “We would have a disorderly default, the debt would double — it is out of the question.”
But in a recent study, Theodore Mariolis, an economist at Panteion University in Athens, argued that the No. 1 problem for Greece under the current system — ahead of debt sustainability, unemployment and the problems of a mismanaged public sector — was its international competitiveness, which he said had declined 30 percent since the country embraced the euro.
Mr. Mariolis estimated that a 50 percent devaluation of the new drachma would soon erase this competitiveness gap.
The views of Mr. Mariolis and Mr. Skaperdas have remained within the narrow confines of academia. Other economists, like Theodore Katsanevas, have taken a more aggressive approach by pushing their drachma solution on Greek television.
“A Greek hotel room is two times as expensive as one in Turkey,” he said, ridiculing the notion that the steep wage cuts and public sector firings that are being demanded by Europe and the International Monetary Fund would restore competitiveness. “We are almost dead now — what we need is a resurrection.”
In many ways, the drachma’s most passionate and well-known local proponent is also its most controversial.
For the last two years, the media magnate George Kouris has used his flagship tabloid, Avriani, to run a relentless campaign that argues Greece is best off leaving the euro for the drachma.
Mr. Kouris, owner of the country’s leading evening news channel, is a die-hard opponent of Mr. Papandreou, and he has been accused of pushing the drachma as a means to wipe out his group’s significant euro debts, a charge he denies.
But he is insistent that the only way forward is for Greece to return to an earlier time.
“The people who now support the euro are the people that put us into it and made us a sick country,” he said. “Before the euro, a bottle of water was 0.50 drachmas. Now it’s 1.70 euros. It is a tragedy.”
