Printing the Drachma: The Messy Future of a Post-Euro Greece

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Introducing a new currency is no small feat. Recent cases -- East Germany’s adoption of the deutsche mark, the Czech-Slovak divorce of 1993, and the creation of the euro itself -- benefited from years of careful planning and broad popular support. If Greece were to abandon the euro, it would have neither.

“Historical precedent suggests this would be hugely challenging,” said Richard Portes, a professor of economics at London Business School. “The situation in Greece is perhaps even worse because it’s not clear that they have the administrative capacity to move quickly to a new currency.”

Greece’s government says it intends to keep the euro even if voters reject the terms of a proposed international bailout in a referendum scheduled for Sunday. While a poll commissioned this week by Bloomberg found the vote too close to call, it showed that 81 percent of Greeks want their country to remain in the euro zone.

Many economists, though, say that would be difficult after a “no” vote -- even if in the long run the country might benefit from such a shift. The Greek banking system is dependent on support from the European Central Bank, which might be withdrawn in that event. That could force Greece to create its own means of exchange -- a new drachma -- to keep its economy running.

Countries switching currencies must grapple with two major questions: how to introduce new notes and coins, and what to do with bank accounts, debts, and financial instruments denominated in the old currency.

National Business Card

The former is relatively straightforward. The Greek central bank owns a press in the Athens suburb of Holargos that prints euro notes. That plant printed Greece’s pre-euro drachma, and could make a new drachma, too.

“A currency is a national business card, so you want to make it right,” said Ralf Wintergerst, head of banknote production at Giesecke & Devrient GmbH, a Munich company that has printed banknotes since the days of Germany’s Reichsmark in the 1920s.

Wintergerst says introducing a new currency typically takes at least six months, and sometimes as long as two years. Artists must draw the notes, security experts then add anti-counterfeit measures such as watermarks and special inks, and bank officials need to plan how much of each denomination is needed and get the money to banks.

Difficult Distribution

“The most challenging thing was to establish efficient distribution and make sure the new currency was available everywhere,” said Boris Raguz, head of the Treasury Directory at Croatia’s central bank, who in 1993 oversaw the introduction of the country’s currency, the kuna, after the breakup of Yugoslavia.

Greater difficulties arise when banks start issuing that money. Because of the time required to distribute new notes and coins, the two currencies have to exist side by side for some time. While Greek banks might move card transactions to the new drachma immediately, shops could accept both -- or perhaps only euros if merchants doubted the value of the new drachma.

“When will the conversion happen? At what rate?” said Antonio Fatas, a professor of economics at Insead business school near Paris. “That’s the big question.”

The two currencies would likely start at a one-to-one exchange rate, which might be fixed for a period of time. The euro was created in 1999, but it existed only virtually for three years, used for electronic transactions at a rate fixed against the francs, marks, and other currencies it replaced. Then on Jan. 1, 2002, euro bills and coins were introduced, though the old currencies were also accepted for about two more months.

Little Planning

Greece would be more complicated because the transition would have to happen fast, with little planning. And unlike most other currencies that have been abandoned, Greece’s current currency -- the euro -- will remain in circulation across Europe no matter what. That means any new currency might have little appeal to Greeks, who would expect its value to fall once the market was allowed to set the exchange rate.

“As soon as anyone got new drachmas stuffed in their pockets, they would do whatever it takes to get rid of them,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.

Trust is Key

Another complication, according to Kirkegaard, is that Greece’s many importers might demand to be paid in euros, rather than depreciating drachmas that would do little to meet their international costs.

Ludek Niedermayer, who headed the risk management department at the Czech central bank when the Czech koruna was introduced in February 1993, said that at the time his country and Slovakia were relatively isolated, having emerged from communism less than four years earlier. Greece, he noted, is far more integrated into the European economy, making it harder to switch.

The key is trust in the new currency, Niedermayer said. That’s something the Czechs and Slovaks both had, and which the Greeks will surely lack.

“If you introduce a currency that no one wants, it’s a very bad start,” Niedermayer said. “I would advise Greeks to stop thinking about leaving the euro at all. It wouldn’t be a happy ending for them. There isn’t any alternative that would be equal to having the euro.”

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