Time to enter a parallel (currency) universe?

Photographer: LOUISA GOULIAMAKI/AFP/Getty Images

Greece's Cuban Path to a Parallel Currency

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The idea of a parallel currency for Greece is worthy of consideration, with even German Finance Minister Wolfgang Schaeuble broaching the possibility as Greece fails to reach an agreement with its creditors. It could work -- albeit not in the way suggested by the pretty models circulated by economists in recent months.

QuickTake Greece's Fiscal Odyssey

Most of these involve Greece issuing some form of IOUs to pay its employees and contractors, with the government accepting these new securities in lieu of taxes at some future date. The specific designs differ (here is a good summary of some of them, and here is a more or less exhaustive classification of parallel currency proposals for the euro area), and there are interesting twists. Before he became Greek finance minister, Yanis Varoufakis suggested discounting the parallel currency -- he called it FT-coin, short for future taxes -- for euros. People would buy it because they'd be able to use 1,000 euros in FT-coins to pay 1500 euros worth of taxes in two years.

No matter what design frills economists tack on to the plans, the general idea is the same: The government would pay people in something other than money, but it would create an incentive for them to use that surrogate as a medium of exchange. Otherwise, the logic goes, nobody would accept it.

The problem with this train of thought is that in Greece, tax credits are not a huge enticement. Greeks are not particularly diligent taxpayers. At the end of last year, they owed the state 76 billion euros ($83 billion) in unpaid levies. Tax evasion is rampant, giving rise to exotic ideas like using housewives, students and even foreign tourists as freelance tax inspectors. If you're not going to pay taxes, you won't pay for tax credits even on the best of terms. Even if the scheme were workable, it would sow the seeds of a new crisis in a few years, once the government started getting back its IOUs instead of genuine tax revenue.

Anyone who has ever lived behind the Iron Curtain knows that the right way to run a parallel currency is based on coercion, not enticement.

Such a system persists in Cuba. That country uses the "convertible peso," or CUC, along with the Cuban peso, or CUP. Foreign tourists exchange their dollars (or, preferably, euros, pounds or yen, given the 10 percent tax on dollar trades) for CUC, which can be used in the "hard currency economy" -- to pay for imported goods, for gas, in tourist-oriented restaurants. Cubans are paid in CUP, which they can spend in local stores (mostly to buy rationed produce) and on services. They are allowed to convert CUP to CUC at a set rate reasonably close to the market one. That's an improvement on, say, the Soviet system, in which you could not legally convert rubles into foreign currency, except in a few special situations and at an extremely unfavorable rate. Still, most Cubans cannot afford to live the CUC life: The average salary on the island is the equivalent of $20 per month. 

Like previous Communist systems, the Cuban one is a pain in the neck to administer, and the government has been promising since 2013 to scrap it. When the Cuban peso is finally unified, the country will still have a parallel currency system, with the dollar unofficially dislodging the CUC. The logic of the situation is that convertible currencies are for those who want access to imports. The government does not encourage that access, but it's still somewhat integrated into the global economy and it wants its elite to have access to nice clothes, good whisky and Swiss chocolate. Therefore, there's a local currency for proles and a convertible one for bosses.

If that doesn't sound very left-wing, it's not just because the practice of leftist ideas tends to be vastly different from the theory. Look at it from a different perspective: A government that wants to provide a minimum standard of living for all its citizens but doesn't have the resources must quarantine its currency system from the rest of the world. Why shouldn't Greece's hard-left government give its citizens a taste of Cuban-style currency duality? There's plenty of food and clothing produced inside the country that cannot be profitably exported. The government could charge for its services in drachmas, or whatever the new parallel currency would be called. Other service providers would have no alternative to taking the soft currency because the 20 percent of the Greek labor force employed in the public sector, including state companies, would only be paid in drachmas. In fact, the government could drastically reduce unemployment by hiring the jobless and paying them in its new currency.

This would, of course, create the potential for hyperinflation, and the government would need to impose exchange restrictions. A black market would immediately spring up, as it did in Ukraine last year under similar circumstances. Ukrainians, however, discovered that unless they planned to travel or buy expensive imports, they could get by just fine with the local currency.

Ugly?  Yes, but one could argue that Greeks hate the alternatives -- austerity and fiscal discipline -- even more than they would hate this taste of Soviet medicine. That's why they elected a determined left-wing government to lead them and fight international creditors every inch of the way.

And once Greece got tired of its parallel currency, it could drop the drachma and go back to using the euro. Montenegro scrapped the Yugoslav dinar in favor of the deutsche mark in 1996 and Ecuador dropped the sucre for the U.S. dollar in 2000 because de-facto parallel currency regimes were deemed unnecessary. There are also more or less successful examples of post-Communist transitions to single convertible currencies. Cast back into the developing world, Greece shouldn't be shy to learn from its new peers.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Gilbert at magilbert@bloomberg.net