W. Mosler: Grexit (2011)

joseba says:

2015/07/08 at 21:32

A Greek exit is not rocket science

http://bilbo.economicoutlook.net/blog/?p=31313

Last Wednesday (July 1, 2015), the ABC radio presenter, Phillip Adams, in a wide ranging interview about the upcoming referendum in Greece and the prospects for the nation, asked the then Greek Finance Minister: “My jokes about printing drachmas in the cellars, remain jokes?” The then Finance Minister replied: “Of course they do … we don’t have a capacity … because … Maybe you don’t know that. But when Greece entered the euro in the year 2000 … one of the things we had to do was to get rid of all our printing presses … in order to impress on the world that this is not a temporary phenomenon … that we mean this to be forever … we smashed the printing presses, so we have no printing presses”.
(…)
There has also been a lot of talk about the Greeks lacking the capacity to manage a currency swap. But it is only 15 odd years ago that the European nations (and their central banks) did exactly that. The transition to the euro was relatively smooth and the experience embodied from that transition would surely not be lost to the Bank of Greece.
They have already moved from drachma to euro – they know all the practical issues, albeit in a non-hostile environment where other Member States were doing the same thing. But the principles remain the same.
The euro nations thus have practical experience with the sort of legislation that would be required for redenomination having performed the same feat less than 15 years ago.
(…)
By exercising the sovereignty embodied in its own constitution, the exiting European nation would reintroduce its own currency and immediately require all tax and other public contractual obligations within the nation to be denominated in that currency.
The strategic operations that would accompany this reissuance do not really concern us. Clearly, a covert operation involving a weekend, the announcement of a bank holiday and the imposition of capital controls for a period would be involved.
The announcement would then come into effect on the first business day of the new week.
The new currency would be empowered because the citizens and corporate entities would have to use it to extinguish their ongoing tax obligations.
The private sector would have to acquire that currency, notwithstanding any decisions or preferences it might have for another currency in which it might store wealth.
Even if there is a second ‘trading’ currency in use, the local currency will always be in demand as long as the national government can enforce its tax laws.
One of the major shortcomings of the several ‘dual currency proposals’ recently put forward as a way to resolve the Eurozone crisis is that they still insist that state taxes and charges be paid for in euros, thus giving rise to continued demand for that currency at the expense of the local currency.
So one reform the Government would have to pursue would be to increase the tax compliance structure to broaden the demand for the new currency.
The actual practicalities of creating the new currency (minting coins and printing bank notes) would involve minimal changes because as we noted above, the national central banks are already responsible for this function.
With sufficient forward planning, the new currency tokens could be issued on the first day of the new system.
There are various interim measures that can be used that would allow the new currency tokens to be produced in sufficient quantities. Secure vouchers, stamped Greek euro-notes, or just the unique Greek identifier on the notes, would all serve as interim measures.
(…)
While the new currency would eventually depreciate (perhaps not in the short-run as it would be in short supply – the proposal is not the same as breaking a currency peg arrangement, for example), the scaremongering that suggests it would be bottomless, leading to hyperinflation, is unfounded.
(…)
What should the initial parity be?
The initial conversion rate is moot with the currency floating. The foreign exchange markets will sort out the levels quickly enough. Floating will give the domestic policy instruments (fiscal and monetary) maximum scope to pursue domestic aims including restoring growth and creating jobs.
(…)
The most obvious starting point for the new currency to avoid these practical issues would be for the Greek government to adopt a one for one parity against the euro and let the currency float.
What about reintroducing the Greek payments system?
An essential but relatively straightforward part of the exit strategy would involve the re-establishment of the sovereign national central bank.
First, the existing national central banks retained most of their prior functions and structure when they entered the so-called Eurosystem.
Second, there are already well-defined structures in place between the Eurosystem and the European System of Central Banks (ESCB), which is composed of the ECB and the central banks of all 28 EU Member States. This structure allows nations outside the Eurozone to conduct independent monetary policy (that is, set their own interest rates) but still allows for close cooperation through the General Council of the Eurosystem.
The first priority for the central bank would be to introduce a viable payments system to facilitate the new currency.
(…)
Introducing a robust wholesale payments system would not be a major issue. The central banks already had functional systems in place when they entered the Eurozone. Further, in terms of the Eurozone’s TARGET2 system, non-euro nations such as Denmark already voluntarily link their national central banks to this system.
There are also alternative systems operating in Europe, which process euro denominated transactions (for example, the system run by the European Banking Association). The retail system would be even easier given the widespread use of the so-called Single European Payments Area (SEPA), which is a system for simplifying bank transfers in the euros. Even non-EU nations (Iceland, Liechtenstein, Norway, and Switzerland) are members, as are Monaco and San Marino.
Second, the new central bank would have to redefine its relationship with the ECB. It would now set its own policy interest rate and be responsible for so-called official transactions, which include foreign exchange market interventions. Much of this expertise remains in the national central banks, given the structure of the Eurosystem.
So in practical terms, I see no real issues in introducing its own currency that are beyond the capacity of the Greek government and the Bank of Greece.
But, there remain issues that need to be addressed:
1. How to handle the euro denominated public and private debt that is outstanding.
2. How to handle bank deposits denominated in euros within the exiting nation.
3. How to manage the possibility of currency depreciation and to minimise the resulting inflation risk and protect real living standards.
5. How to reduce speculative capital flows (for example, using capital controls).
6. How to deal with any changes to the legal framework governing cross-border trade if the nation also is expelled from the EU, among other issues.
I dealt with each one of those issues in detail in my Eurozone book and provided a best-practice template for managing the issues and exiting as smoothly as possible – given that the early days would be somewhat chaotic.

Iruzkinak (4)

joseba says:

2015/07/08 at 06:38

Grexit:

Book. Draft version: http://bilbo.economicoutlook.net/blog/?cat=44

Bill Mitchell-en Chapter 23 Abandon the Euro Costs, threats and opportunities

Options for Europe – Part 75 to 80

The path to a disorderly exit: http://bilbo.economicoutlook.net/blog/?p=27686

Does EMU exit mean EU expulsion?: http://bilbo.economicoutlook.net/blog/?p=27693

Issuing the new currency: http://bilbo.economicoutlook.net/blog/?p=27715

The exit process / Transaction costs: http://bilbo.economicoutlook.net/blog/?p=27725

Why the need for secrecy? / Lex Monetae – Re-denomination / Re-denomination rather than default? / Inflation threat from depreciation / Would the nation need to impose capital controls?: http://bilbo.economicoutlook.net/blog/?p=27735

Erantzun
- joseba says:
  
  2015/07/08 at 06:53
  
  MMT, The Euro and The Greatest Prediction of the Last 20 Years:
  
  http://neweconomicperspectives.org/2012/07/mmt-the-euro-and-the-greatest-prediction-of-the-last-20-years.html
  
  Erantzun
joseba says:

2015/07/08 at 21:32

A Greek exit is not rocket science

http://bilbo.economicoutlook.net/blog/?p=31313

Last Wednesday (July 1, 2015), the ABC radio presenter, Phillip Adams, in a wide ranging interview about the upcoming referendum in Greece and the prospects for the nation, asked the then Greek Finance Minister: “My jokes about printing drachmas in the cellars, remain jokes?” The then Finance Minister replied: “Of course they do … we don’t have a capacity … because … Maybe you don’t know that. But when Greece entered the euro in the year 2000 … one of the things we had to do was to get rid of all our printing presses … in order to impress on the world that this is not a temporary phenomenon … that we mean this to be forever … we smashed the printing presses, so we have no printing presses”.
(…)
There has also been a lot of talk about the Greeks lacking the capacity to manage a currency swap. But it is only 15 odd years ago that the European nations (and their central banks) did exactly that. The transition to the euro was relatively smooth and the experience embodied from that transition would surely not be lost to the Bank of Greece.
They have already moved from drachma to euro – they know all the practical issues, albeit in a non-hostile environment where other Member States were doing the same thing. But the principles remain the same.
The euro nations thus have practical experience with the sort of legislation that would be required for redenomination having performed the same feat less than 15 years ago.
(…)
By exercising the sovereignty embodied in its own constitution, the exiting European nation would reintroduce its own currency and immediately require all tax and other public contractual obligations within the nation to be denominated in that currency.
The strategic operations that would accompany this reissuance do not really concern us. Clearly, a covert operation involving a weekend, the announcement of a bank holiday and the imposition of capital controls for a period would be involved.
The announcement would then come into effect on the first business day of the new week.
The new currency would be empowered because the citizens and corporate entities would have to use it to extinguish their ongoing tax obligations.
The private sector would have to acquire that currency, notwithstanding any decisions or preferences it might have for another currency in which it might store wealth.
Even if there is a second ‘trading’ currency in use, the local currency will always be in demand as long as the national government can enforce its tax laws.
One of the major shortcomings of the several ‘dual currency proposals’ recently put forward as a way to resolve the Eurozone crisis is that they still insist that state taxes and charges be paid for in euros, thus giving rise to continued demand for that currency at the expense of the local currency.
So one reform the Government would have to pursue would be to increase the tax compliance structure to broaden the demand for the new currency.
The actual practicalities of creating the new currency (minting coins and printing bank notes) would involve minimal changes because as we noted above, the national central banks are already responsible for this function.
With sufficient forward planning, the new currency tokens could be issued on the first day of the new system.
There are various interim measures that can be used that would allow the new currency tokens to be produced in sufficient quantities. Secure vouchers, stamped Greek euro-notes, or just the unique Greek identifier on the notes, would all serve as interim measures.
(…)
While the new currency would eventually depreciate (perhaps not in the short-run as it would be in short supply – the proposal is not the same as breaking a currency peg arrangement, for example), the scaremongering that suggests it would be bottomless, leading to hyperinflation, is unfounded.
(…)
What should the initial parity be?
The initial conversion rate is moot with the currency floating. The foreign exchange markets will sort out the levels quickly enough. Floating will give the domestic policy instruments (fiscal and monetary) maximum scope to pursue domestic aims including restoring growth and creating jobs.
(…)
The most obvious starting point for the new currency to avoid these practical issues would be for the Greek government to adopt a one for one parity against the euro and let the currency float.
What about reintroducing the Greek payments system?
An essential but relatively straightforward part of the exit strategy would involve the re-establishment of the sovereign national central bank.
First, the existing national central banks retained most of their prior functions and structure when they entered the so-called Eurosystem.
Second, there are already well-defined structures in place between the Eurosystem and the European System of Central Banks (ESCB), which is composed of the ECB and the central banks of all 28 EU Member States. This structure allows nations outside the Eurozone to conduct independent monetary policy (that is, set their own interest rates) but still allows for close cooperation through the General Council of the Eurosystem.
The first priority for the central bank would be to introduce a viable payments system to facilitate the new currency.
(…)
Introducing a robust wholesale payments system would not be a major issue. The central banks already had functional systems in place when they entered the Eurozone. Further, in terms of the Eurozone’s TARGET2 system, non-euro nations such as Denmark already voluntarily link their national central banks to this system.
There are also alternative systems operating in Europe, which process euro denominated transactions (for example, the system run by the European Banking Association). The retail system would be even easier given the widespread use of the so-called Single European Payments Area (SEPA), which is a system for simplifying bank transfers in the euros. Even non-EU nations (Iceland, Liechtenstein, Norway, and Switzerland) are members, as are Monaco and San Marino.
Second, the new central bank would have to redefine its relationship with the ECB. It would now set its own policy interest rate and be responsible for so-called official transactions, which include foreign exchange market interventions. Much of this expertise remains in the national central banks, given the structure of the Eurosystem.
So in practical terms, I see no real issues in introducing its own currency that are beyond the capacity of the Greek government and the Bank of Greece.
But, there remain issues that need to be addressed:
1. How to handle the euro denominated public and private debt that is outstanding.
2. How to handle bank deposits denominated in euros within the exiting nation.
3. How to manage the possibility of currency depreciation and to minimise the resulting inflation risk and protect real living standards.
5. How to reduce speculative capital flows (for example, using capital controls).
6. How to deal with any changes to the legal framework governing cross-border trade if the nation also is expelled from the EU, among other issues.
I dealt with each one of those issues in detail in my Eurozone book and provided a best-practice template for managing the issues and exiting as smoothly as possible – given that the early days would be somewhat chaotic.

Erantzun
joseba says:

2015/07/09 at 19:31

Introducing a New Currency

http://heteconomist.com/introducing-a-new-currency/

Erantzun

Iruzkinak (4)

joseba says:

joseba says:

joseba says:

joseba says:

Utzi erantzuna Cancel Reply