Could a Parallel Currency Help Save Greece From Drowning?
As Greece’s financial plight worsens, an odd idea keeps popping up: a parallel currency alongside the euro that would circulate inside Greece and be used to pay for anything from taxes to food and clothing. Even German Finance Minister Wolfgang Schaeuble has said that Greece may need a parallel currency if talks with creditors fail, people familiar with his views told Bloomberg.
One version of the idea calls the second currency a TAN, for tax anticipation note. Another calls it a grec, for government reimbursement exchange credit. There’s also theTCC, for tax credit certificate. In 2014, before becoming Greece’s finance minister, Yanis Varoufakis pitched European governments on the FT-coin, where FT stands for future taxes and coin refers to bitcoin.
Details differ quite a bit, but the big idea is to free up euros to pay foreign debts and to juice economic growth by spreading more money around domestically. The money would be an IOU issued by the Greek government that could be passed from one person to another. The government could print a bunch of the new currency (or create electronic ledger entries if the currency is virtual) and spend it on whatever governments buy, including civil servants’ salaries. People would in theory be willing to accept the money because it could be used to pay taxes.
Greece doesn’t have the option of monetary stimulus, because it doesn’t control its own money—the European Central Bank does. And it can’t run bigger deficits, because creditors won’t stand for it.
But is this idea anything more than an intellectual exercise? Unfortunately for Greece, probably not.
“No, it’s not a good idea, and no, it has no chance of happening,” said Jacob Funk Kierkegaard, a senior fellow at the Peterson Institute for International Economics. Introducing it, he said, “would surely aggravate the other Europeans as well as the ECB. It would politically aggravate the situation that Greece is in.” He called it “very primitive and naive, knee-jerk Keynesianism.”
People would naturally be suspicious that the new currency would be funny money, and wouldn’t accept it on the same terms as euros, Kierkegaard said. Given Greece’s track record, they would tend to fear that the government would print too much of it, creating an oversupply that would degrade the currency’s value. And because the initial allotment would produce a smaller economic spurt than the government was counting on, the government would indeed be tempted to print more, Kierkegaard said.
In February, Huw Pill and Themistoklis Fiotakis of Goldman Sachs International described the idea of a parallel currency as belonging to a “gray area” between fully staying in the euro zone and completely exiting.
Backers of parallel-currency concepts say the idea can work. “The grec is emphatically not ‘funny money.’ It has a real, tangible value from day one,” Alan Harvey, senior economist at the Institute for Dynamic Economic Analysis (IDEA) in Seattle, wrote in a paper. It’s the ability to use the government-created alternative currency to pay taxes that guarantees its value, Harvey said in an interview. Ordinarily money is created through bank lending. “This is a different way of creating money,” he said.
Parallel currencies are sometimes found in countries that impose controls on the inflow and outflow of money. Cuba has had a nonconvertible peso alongside a convertible CUC, although it’s phasing out the latter. Another twist is a local currency like Ithaca Hours, which is used to buy goods and services in the area of Ithaca, N.Y.
But even enthusiasts acknowledge problems. Robert Parenteau, who along with Trond Andresen has written about the TAN as an electronic parallel currency, said he pitched the Greeks on the concept with the assistance of University of Texas economist Jamie Galbraith, who has worked closely with Varoufakis. He hasn’t heard back, and now time is running out on the government, he said.
“These are academics who are trying to be policymakers,” said Parenteau, sole proprietor of MacroStrategy Edge, an investment and economic consultancy in Berkeley, Calif. Co-author Andresen is at the Norwegian University of Science and Technology.
All is not lost, though, Parenteau said: “Maybe the idea will take root in Spain or Italy.”