Should Greeks Leave the Euro and Return to the Drachma?

The debate surrounding Greece's economy has been ongoing for years, with one of the most discussed proposals being the return of the drachma as the national currency. This article delves into the pros and cons of adopting the drachma once again, focusing on the economic implications and feasibility of such a move.

Chronic Low Productivity and Tourism Benefits

Greece has long suffered from chronic low productivity, which has hampered economic growth. Adherents of the drachma argue that a devalued drachma would significantly benefit the tourism industry. With a weaker drachma, Greek products and services would become more affordable for international tourists, potentially boosting this vital sector of the economy.

Additionally, the devaluation would make Greek goods and services more competitive in the global market, thus reducing reliance on imports. However, it is crucial to consider the impact of currency devaluation on the cost of living. Imports would become more expensive, particularly for essentials like food and daily necessities.

Economic Growth vs. Higher Costs

While a devalued drachma might offer short-term benefits in terms of economic growth, it would come at a significant cost. One of the main financial challenges would be the repayment of Greece's Euro-denominated debt. Interest rates on this debt would become unaffordable without EU support through low-interest loans, which are no longer available.

Economic devastation would follow a default on the debt. The financial and social impact would be severe, leading to job losses, reduced living standards, and a potential increase in the unemployment rate. This scenario underscores the need for careful consideration before making such a drastic economic shift.

Currency Creation and Stability

Discussing the feasibility of creating a new currency raises several concerns. In the absence of the drachma, Greece would need to introduce a new currency. However, this is infeasible for a country that is already part of the eurozone. Other EU countries with their own currencies are expected to switch to the euro eventually, ensuring the stability of the currency.

Moreover, issuing a new and untested currency could lead to inflation, which would significantly devalue it. The predictability and stability provided by the euro are valuable assets that no country should risk by creating a currency of dubious value.

The Greek debt is currently held in euros, and the cost of repaying this debt would become unsustainable if Greece were to revert to the drachma. For instance, if the drachma-devalued 100 euros became worth only 10 drachma, the cost of goods and services would skyrocket, making it nearly impossible for the country to pay for essential imports.

Humanitarian and Ethical Considerations

The economic argument against returning to the drachma extends to humanitarian and ethical considerations. Imposing a currency devaluation that leads to increased poverty and hardship for the population is unjust. Strained social and political conditions can also lead to displacement, with significant numbers of people becoming refugees, exacerbating the economic and social challenges.

The preponderance of evidence suggests that such a drastic change would drastically worsen living conditions for the majority of the population. It is essential to prioritize human well-being and avoid policy decisions that might lead to mass suffering.

Economic Theory and Practical Implications

Economists and policymakers emphasize the importance of practical economic theory and realistic assessments of the potential impact of currency changes. Nobel laureate N. Gregory Mankiw's perspective provides a fresh perspective on the issue, suggesting that while devaluation might offer short-term economic benefits, the long-term consequences could be detrimental. The benefits of devaluation would predominantly accumulate to the rich, entrenched interests, and real winners would be the already rich stakeholders, such as property owners and elites.

In contrast, the underprivileged and working-class individuals would bear the brunt of any negative economic fallout. They include waiters, shop assistants, farmers, and factory workers who would lose their livelihoods and face significant hardship. Therefore, retaining the euro as the national currency, despite its occasional challenges, is often seen as a safer and more stable option.

Flexibility and Future Considerations

Given the complexities involved, a hybrid approach might be more practical. Greece could maintain the euro for its international and intra-EU transactions, while introducing the drachma for domestic use in certain sectors. This strategy could offer the flexibility to mitigate some of the risks associated with both currencies. By accepting and using the euro in trade with the EU and other markets, Greece could maintain stability in its external transactions.

Simultaneously, using the drachma for services and transactions within the domestic market would allow for some of the short-term economic benefits. This dual-currency regime could help Greece navigate its economic challenges while minimizing the risks associated with a full return to the drachma.

Although the EU has evolved into a more bureaucratic system, it is not necessarily inflexible. Should the EU become more adaptable, it could continue to be a viable framework for member states. Otherwise, the increasing dissatisfaction with the EU's rigid structures could lead to a search for alternative models to address the growing concerns of citizens.

Conclusion

The decision to return to the drachma is exceedingly complex and fraught with risks. While a devalued drachma could potentially boost tourism and trade, the short-term benefits would likely come at the cost of increased economic hardship and social upheaval. It is imperative to weigh these factors carefully and consider practical solutions that balance economic stability and social well-being.

Greece, like any other country, must navigate the challenging waters of economic reform with care. While a detailed policy framework, supported by rigorous analysis and public support, will be necessary, the hybrid currency approach offers a potential middle ground that balances economic growth with social and political stability.