Nick Miller, The Age, June 18, 2015
London: Less than a century ago, Europeans were literally walking across borders with suitcases full of money. Millions of Austro-Hungarian crowns were put in sacks and tied to horses or jammed into boxcars.
That is until they closed the borders and made it illegal.
Before the Grexit, there was the “Austrexit”.
For an insight into the exit of Greece from the euro–how it could happen, and the chaos that may ensue, economist Michael Spencer dials back almost 100 years, to the wreckage of World War I.
With the breakup of the Austro-Hungarian Empire into Austria, Hungary and Czechoslovakia, so too the currency union broke down. Citizens were told they had to bring their old crowns to the post office, to be stamped and thereby turned into new, local currency.
But when you create a new currency, Mr Spencer explains, you get “massive cross-border flows of the old currency”, as everyone tries to move their money to where it will be worth the most.
One estimate is that 6.5 billion crowns, equal to the entire estimated circulation in Hungary, were transferred out of Czechoslovakia and Austria (which faced unprecedented unemployment, huge debt payments and the problem of paying for a big civil service, leading to justified fears the new currency would quickly inflate).
In Czechoslovakia, as the currency separation began, borders were ordered closed and all postal communications abroad were suspended for two weeks. Heads of households were ordered to surrender all their crowns for stamping, and bank deposits were converted at a 1:1 rate. Half of the stamped currency was withheld by the government as a “forced loan”.
In Austria, the government put controls on the sale of securities and stocks to the other states to prevent an influx of notes from Czechoslovakia.
For the record Mr Spencer, chief economist for Deutsche Bank Asia Pacific, is not saying Grexit will happen. They are “still of the view that a deal will get done in the next few days”, making this all just hypothetical.
“The Greeks dislike austerity but they want to stay in the euro … If they put in place capital controls and people in Greece are trading IOUs or tax refund receipts or whatever people come up with … that’s a scenario in which we think the Greek government loses its popular support. [Greek Prime Minister Alexis] Tsipras will do what he needs to do to avoid that outcome.”
But nevertheless, Grexit is on the table, governments are making contingency plans and economists are imagining what it would look like.
In 1994, Mr Spencer co-wrote a paper on the fragmentation of the Austro-Hungarian crown. He still sees it as the “key historical example of a currency union breakup”.
Though things are different now. “Now of course you don’t need to walk across the border, you just log onto your bank account with your security code and transfer money out of the country,” Mr Spencer says. “There’s nothing to stop someone in Greece taking their entire [bank] deposit, transferring it to a bank in France, then living off the ATM.”
There will have to be strict controls on money to stop that happening–the Greek banking system has already lost 40 per cent of its deposits in three years. “It’s going to be absolutely chaotic for a few weeks and the rest of Europe will look on in [horror].”
And there is a lingering hangover.
“My reading of economic history is that when you’ve had these kinds of crises you don’t wake up the next morning saying ‘oh what a relief the currency’s been devalued’, you wake up thinking ‘I am poorer, prices of everything that I want to import have gone up by 40 per cent’. Consumption collapses, imports collapse.
“It’s entirely possible that a year later the economy is growing … but it could be years before Greeks feel that they are better off than they were before the devaluation.”
But other economists disagree.
In 2012, a team from Capital Economics led by Roger Bootle won a £250,000 ($508,000) prize for outlining the “smoothest process by which a member state could exit the Eurozone”.
The model is highly technical, and envisions a “substantial default” of government debt. It proposes top-secret preparations, followed by a public announcement just three days ahead of the new currency being introduced.
Immediately after the announcement, domestic banks and financial markets close to prevent capital flight. There would be no “stamping” of euros into drachmas–instead all wages, prices and bank deposits are immediately converted to the new currency, and “non-cash” means of payment are used until the new money is printed.
Mr Bootle says his plan is not only possible, it’s desirable.
“The main purpose of making such a change is to allow the exchange rate to fall. That should not be resisted by the Greek authorities, it’s part of the solution,” he says. He would expect the drachma to stabilise at more than half the value of the euro.
There is no escaping the need for capital controls and restrictions on the banks, to avoid “financial catastrophe”, Mr Bootle says.
However he doesn’t think the practical challenges of printing a new currency are particularly difficult. People can carry on using euros, or build up credit, or circulate IOUs. “It’s a comparatively minor problem, a short-term thing,” he says.
And the project as a whole is “eminently desirable”, he says.
After the disruption to transactions, and the banking system, and the shock for Greeks as import prices shoot up, the economy would respond and start to recover (helped by a massive upsurge in tourism and a boost to local agriculture and manufacturing).
“I don’t see any way, without this, that Greece can escape from the current mess,” Mr Bootle says. “When people say to me ‘oh wouldn’t an exit from the euro cause a few problems’, I want to know which planet they’re living on. There’s a question of what the alternatives are, and this does offer the prospect of a very real escape.
“It wouldn’t be a disaster, it would be a salvation. In a year’s time people will look back and say–why on Earth didn’t we do that sooner?”
London: Less than a century ago, Europeans were literally walking across borders with suitcases full of money. Millions of Austro-Hungarian crowns were put in sacks and tied to horses or jammed into boxcars.
That is until they closed the borders and made it illegal.
Before the Grexit, there was the “Austrexit”.
For an insight into the exit of Greece from the euro–how it could happen, and the chaos that may ensue, economist Michael Spencer dials back almost 100 years, to the wreckage of World War I.
With the breakup of the Austro-Hungarian Empire into Austria, Hungary and Czechoslovakia, so too the currency union broke down. Citizens were told they had to bring their old crowns to the post office, to be stamped and thereby turned into new, local currency.
But when you create a new currency, Mr Spencer explains, you get “massive cross-border flows of the old currency”, as everyone tries to move their money to where it will be worth the most.
One estimate is that 6.5 billion crowns, equal to the entire estimated circulation in Hungary, were transferred out of Czechoslovakia and Austria (which faced unprecedented unemployment, huge debt payments and the problem of paying for a big civil service, leading to justified fears the new currency would quickly inflate).
In Czechoslovakia, as the currency separation began, borders were ordered closed and all postal communications abroad were suspended for two weeks. Heads of households were ordered to surrender all their crowns for stamping, and bank deposits were converted at a 1:1 rate. Half of the stamped currency was withheld by the government as a “forced loan”.
In Austria, the government put controls on the sale of securities and stocks to the other states to prevent an influx of notes from Czechoslovakia.
For the record Mr Spencer, chief economist for Deutsche Bank Asia Pacific, is not saying Grexit will happen. They are “still of the view that a deal will get done in the next few days”, making this all just hypothetical.
“The Greeks dislike austerity but they want to stay in the euro … If they put in place capital controls and people in Greece are trading IOUs or tax refund receipts or whatever people come up with … that’s a scenario in which we think the Greek government loses its popular support. [Greek Prime Minister Alexis] Tsipras will do what he needs to do to avoid that outcome.”
But nevertheless, Grexit is on the table, governments are making contingency plans and economists are imagining what it would look like.
In 1994, Mr Spencer co-wrote a paper on the fragmentation of the Austro-Hungarian crown. He still sees it as the “key historical example of a currency union breakup”.
Though things are different now. “Now of course you don’t need to walk across the border, you just log onto your bank account with your security code and transfer money out of the country,” Mr Spencer says. “There’s nothing to stop someone in Greece taking their entire [bank] deposit, transferring it to a bank in France, then living off the ATM.”
There will have to be strict controls on money to stop that happening–the Greek banking system has already lost 40 per cent of its deposits in three years. “It’s going to be absolutely chaotic for a few weeks and the rest of Europe will look on in [horror].”
And there is a lingering hangover.
“My reading of economic history is that when you’ve had these kinds of crises you don’t wake up the next morning saying ‘oh what a relief the currency’s been devalued’, you wake up thinking ‘I am poorer, prices of everything that I want to import have gone up by 40 per cent’. Consumption collapses, imports collapse.
“It’s entirely possible that a year later the economy is growing … but it could be years before Greeks feel that they are better off than they were before the devaluation.”
But other economists disagree.
In 2012, a team from Capital Economics led by Roger Bootle won a £250,000 ($508,000) prize for outlining the “smoothest process by which a member state could exit the Eurozone”.
The model is highly technical, and envisions a “substantial default” of government debt. It proposes top-secret preparations, followed by a public announcement just three days ahead of the new currency being introduced.
Immediately after the announcement, domestic banks and financial markets close to prevent capital flight. There would be no “stamping” of euros into drachmas–instead all wages, prices and bank deposits are immediately converted to the new currency, and “non-cash” means of payment are used until the new money is printed.
Mr Bootle says his plan is not only possible, it’s desirable.
“The main purpose of making such a change is to allow the exchange rate to fall. That should not be resisted by the Greek authorities, it’s part of the solution,” he says. He would expect the drachma to stabilise at more than half the value of the euro.
There is no escaping the need for capital controls and restrictions on the banks, to avoid “financial catastrophe”, Mr Bootle says.
However he doesn’t think the practical challenges of printing a new currency are particularly difficult. People can carry on using euros, or build up credit, or circulate IOUs. “It’s a comparatively minor problem, a short-term thing,” he says.
And the project as a whole is “eminently desirable”, he says.
After the disruption to transactions, and the banking system, and the shock for Greeks as import prices shoot up, the economy would respond and start to recover (helped by a massive upsurge in tourism and a boost to local agriculture and manufacturing).
“I don’t see any way, without this, that Greece can escape from the current mess,” Mr Bootle says. “When people say to me ‘oh wouldn’t an exit from the euro cause a few problems’, I want to know which planet they’re living on. There’s a question of what the alternatives are, and this does offer the prospect of a very real escape.
“It wouldn’t be a disaster, it would be a salvation. In a year’s time people will look back and say–why on Earth didn’t we do that sooner?”
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