Monday, 13 February 2012

What would happen if Greece leaves the European Monetary Union

What would happen if Greece leaves the European Monetary Union

The Euro would become a foreign currency like the US Dollar in Greece. Very little would actually change.

It would be illegal for the Greek monetary authority to overprint a foreign currency, the Euro or the US Dollar, stating it is worth 50 per cent less. Foreign currencies, for example the US Dollar or the Euro, trade in foreign exchange markets. The US Dollar cannot be overprinted by the Greek goverment stating that it is now 50 per cent less in real value. The same is true for the Euro as a foreign currency.

Greek citizens would own a lot of foreign currency, namely, Euros, which play a very important role in the world economy, exactly like the US Dollar. Greek citizens would never lose one cent in value. Greeks will never lose real value holding US Dollars, Yen, Swiss Franks, OR EUROS.

All companies would carry on quoting prices in the Euro, which would be generally available in Greece, and the New Drachma, IF it were to be introduced.

Payments would be accepted in the Euro, a generally available foreign currency. There would never be an overprinting of Euros in Greece as a Drachma worth 50% less. The Euro would simply be a foreign currency like the US Dollar, the Rouble, the Chinese Yuan, the Japanese Yen, the British Pound or the South African Rand.

The Greek central bank would manage the creation of new Drachmas in Greece via fractional reserve banking in Greece. Credit would be created in New Drachmas via fractional reserve banking just like in all other economies. The Euro would circulate in the Greek economy with the new Drachma, the US Dollar, Swiss Francs, etc.. The Euro would simply be a very generally available foreign currency. All products in Greece would have an almost permanently stable price in Euros and maybe an increasing price in the New Drachma, depending on how badly or how well the new economic regime in Greece outside the EMU is being managed by the Greek private sector, not the Greek government.

This is not new territory. Many countries have passed this way in the past.

Inflation-adjusting the entire Greek money supply would remove the total cost of inflation (not inflation) from the Greek economy under complete co-ordination (everybody doing it).

Capital maintenance in units of constant purchasing power as authorized in IFRS would automatically maintain the constant purchasing power of all Greek companies constant for an indefinite period of time in al Greek companies that at least break even in real value at any level of inflation or deflation - ceteris paribus - whether they own any revaluable fixed assets or not.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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