What if Greece had to get a new currency?
- 13 February 2012
- From the section Business
Although the immediate threat of defaulting on its debt looks to have been averted, Greece still faces years of economic struggle. Support is growing within the country for a return to the drachma and some European leaders have said the euro could survive a Greek exit. Radio 4's Chris Bowlby asks what would happen if Greece had to get a new currency?
The eurozone crisis is not just about political deals or high finance. It is also about confidence in the cash in people's pockets.
The euro was meant to symbolise a more united and stable continent for every eurozone citizen.
But if the single currency begins to fragment, if a country or countries reintroduce national currencies, everyone in the eurozone could be affected.
Haggling has continued over the terms of the latest Greek bailout, while political tension rises in Greece itself.
And as austerity bites deeper, few believe the overall crisis will be solved soon.
So there has been a very different, private policy conversation recently, full of angst, about what might happen if the eurozone cannot stay together.
"I've spoken to people about this in chancelleries and in parlours of power across Europe," says David Marsh, who has written a history of the euro, co-chairs a central banking think tank and stays in close contact with the euro's key players.
"I am convinced that there is a Plan B - people have told me that there is one," he adds. "But I don't know what it is and there's no reason why anybody should even think about making it open. It has got to be locked in a safe."
The reason for this secrecy?
Because when it comes to money, to the cash in people's pockets and bank accounts, then psychology lurks, and panic is always possible.
In Greece, there has already been a "slow run on the banks", reports political scientist Aristotle Kallis, as people take cash out of their accounts or send it abroad.
"They still feel that something will go horribly wrong - either Greece is going to move out of the euro or be kicked out of the euro."
And then, they fear, "there's going to be a devaluation of the new currency and all this money will be converted automatically to the new currency".
A government planning to leave the euro is likely to put in a discreet but urgent call to one of the top international currency printers - like the UK-based firm De La Rue.
It prints everything from the UK's pound sterling to the newest version of the currency in Iraq, the dinar.
The company will not comment on any plans it may have for Europe, but is clearly ready should opportunity arise.
So how long does it take to plan and introduce new notes and coins?
"I don't think you could do it much faster than four months," says Mark Crickett, one of De La Rue's consultants.
But a government could not commission and take delivery of a new currency without word leaking out and panic spreading.
It is much more likely that a withdrawal for the euro would be announced suddenly, and then there would be an interim period - those four months, say - during which a temporary national currency would be used.
Euro notes previously in circulation in a withdrawing country might be overprinted, or have special stickers added.
But how would, say, Greek citizens react to the prospect of their euro cash being overprinted into rapidly devaluing new drachmas?
Although the initial official exchange rate might be, say, one new drachma to one euro, economists expect a rapid devaluation of the new currency of 50% or more.
As capital controls within Greece would be likely to restrict Greeks' ability to convert euros to new currency at the devalued rate, those who have already been stockpiling old euros under their mattresses would probably head for the border.
In this kind of situation, says Mark Crickett, governments are left doing things like "sealing borders… to try to prevent the movement of currency".
And that interruption to the free movement of goods and people could call into question a country's membership of the European Union itself.
Any such action by one government would also prompt panic in other weaker eurozone countries, as citizens assumed their governments might follow suit.
Larry Hatheway, chief strategist of the UBS investment bank, has co-written one of the most extensive studies of what a eurozone break-up would mean.
"Imagine," he says, "that you are a Portuguese citizen, and someone walks into your office one day and says "Gee, did you hear the news? Greece just left the eurozone?"
"The logical response, it seems to me, would be to seriously consider whether to continue to keep your wealth, your assets, your money… in Portugal."
The political leaders' Plan B, some kind of firewall of finance and political commitment to prevent so-called contagion, should then emerge.
But could it counter the popular mood?
Attitudes to money across the eurozone could change radically after what Mr Hatheway calls "the unthinkable has happened".
There would be many thousands of people trying to move euros across borders and trade them against rapidly depreciating new national currencies.
One very well-informed source told us the authorities in Germany were even discussing the possibility of the whole euro currency having to be redesigned and replaced if it was compromised by irregular trade.
And a prominent German newspaper, the Frankfurter Allgemeine Sonntagszeitung, has been recalling the Cold War when the Bundesbank kept an entire spare run of the West German currency, the D-mark, in storage - in case East Germany or the Soviet Union managed to compromise the circulating money with forgeries.
If the eurozone cannot hold together, the continent's cash may be about to return to a similar period of uncertainty, as people feel in their pockets the consequences of the politicians' failure.
You can listen to Chris Bowlby's full Analysis programme about the future of the euro on Monday 13 February at 20:30 GMT and again on Sunday 19 February at 21:30. You can also listen on the BBC Radio 4 website, and download the podcast.