Drachma

We might see one of the world’s oldest currencies resurrected. A number of important analysts see Greece leaving the European Monetary Union and returning to the use of its old currency, the drachma.

Earlier this month, elections were held in Greece. No government could be formed out of that fragmented vote. A caretaker administration is in place in Athens. New elections will be called next month.

No one really expects Greek voter sentiment to change dramatically between the last elections and the next. No one is too hopeful the next round of balloting will produce a stable coalition of parties capable of leading the country out of this predicament.

First, Greece lost effective control of its economy. Now it has no government. The calamity just worsens.

Greek voters are, imaginably, in great pain. The austerity program, imposed as a conditionality for the bailout of the southern European economy, washed away jobs, brought down wage levels and downsized state subsidies the Greeks were long used to.

It is doubtful a stable government could be formed in Athens dedicated to the program of fiscal discipline the rest of the Eurozone expects Athens to pursue. The rest of the members of the Eurozone, however, expect Athens to keep to the path of austerity agreed upon earlier.

If Greece does not keep to the targets of the austerity program, it cannot expect any more bailout packages from her similarly cash-strapped European partners. If Greece rejects the austerity program it earlier agreed to, the country will have to leave the monetary union.

The departure from the union by a relatively small economy will not be fatal to the rest. But that departure will likely be fatal to Greece’s economy. Analysts project that the drachma, as soon as it is re-adopted, will shed 60% of its exchange value. That implies a dramatic drop in the purchasing power of all Greeks and an inflationary surge in what will become a pariah economy.

The far-right and far-left parties that win votes by peddling a delusory anti-austerity line may actually be inviting an even worse fate for the Greeks. They are not likely, however, to abandon a platform that serves them well in the electoral arena.

The mere possibility of Greece exiting the monetary union now runs on its own strange dynamic. Greek citizens are rushing to cash in their euros and deposits these in foreign banks. The large banks, for their part, are unloading their euros, seeking sanctuary in the US dollar. This caused the sharp depreciation of the euro the past week.

As a result, the dollar’s exchange value spiked against all other currencies, not just the euro. We saw that in the depreciation of the peso (along with other Asian currencies) against the dollar.

Because some of the major European economies are now in recession, China’s growth slowed down. Deceleration of China’s growth, in turn, pushes down overall growth of the global economy. The world’s second largest economy was earlier expected to be the driver of growth for everybody else.

The worsening financial situation in the Eurozone affects everybody else. A major collapse of the euro will produce a global financial tsunami no one wants to see happen.