Sheila McKinney

Tuesday, June 5, 2012

What a New Currency Would Mean for Greece

All eyes are on Greece's next election on June 17th, which will determine the future of Greece continuing as a member of the Eurozone or going back to their old currency, the drachma. The new government could either be pro-euro and enforce the austerity measures or just as likely not accept the radical budget cuts and try to renegotiate the reforms and austerity measures with a softer tone. The question becomes will Europe accept any relaxation of the austerity measures that were negotiated under the previous Greek government? It could come down to a battle between France and Germany to either promote growth or strigent savings for Greece. In case Europe doesn't accept anything other than strict austerity measures, Greece will not receive the second half of its 145 billion euros (USD $185 b) bailout loan from the European Financial Stability Facility and the remaining 26 billion euros form the International Monetary Fund that Greece is due to receive in installments in 2016. As a result, Greece would not be able to pay its upcoming bond obligations to its creditors this year and the country's banks would collapse. This would make it impossible for Greece to continue operatin in the euro as the ECB would not lend any more money to Greek banks. This way Greece would be forced to start printing its won currency a.k.a. temporary IOUs to pay the loans and to finance all of its economy. The new currency would convert all the previous euro prices for everything into the new drachma currency which would completely replace the euro for Greece.