One Country, Two Currencies?

People use the ATMs of a closed bank next to an anti-EU and German swastika sign in Athens, Tuesday, June 30, 2015. Greece is set to become the first developed nation to not pay its debts to the International Monetary Fund on time, as the country sinks deeper into a financial emergency that has forced it put a nationwide lockdown on money withdrawals. (AP Photo/Thanassis Stavrakis)

Greece went into partial default on Tuesday, but Frances Coppola writes that last Sunday was the day the euro died:

There can now be no winners. While Greece remained depressed but compliant, the EU masters could pretend that Euro membership would eventually deliver the promised prosperity. But now, even if Greece by some miracle remains in the Euro, its relationship with the rest of the Eurozone is fundamentally changed.

Freezing ELA means that Greece can now only regard itself as a “user” of the Euro rather than a full member of the currency union. There is no legal means for countries to leave the Euro, but it seems that they can be frozen out. This should not be seen as similar to the Cyprus situation: liquidity in Cyprus was restricted because its banks were insolvent. Greece’s banks are not insolvent (yet). The ECB’s statement makes no mention of bank solvency: the liquidity freeze responds to the failure of the talks and the decision by the Greek government to call a referendum. The freeze is therefore an overtly political move. The independence of the ECB has been shattered.

The “irrevocability” of the Euro is no longer credible. Using liquidity restriction to force a country to introduce capital controls is tantamount to suspending its Euro membership.

The euro isn’t really dead, of course — it’s still the official currency of the 19-member eurozone, including the Big Four of Germany, France, Spain, and Italy. For all the euro’s troubles, that’s still a lot of economic firepower.

But what about Greece? It’s almost out of euros and it’s almost out of other people’s euros, too. Is some kind of duel-currency economy possible? Athens could beg or save (hah!) for the euros it needs for imports, but run its domestic economy on a revived drachma. That’s a lousy, and for all I know illegal solution — but it would beat the hell out of running the domestic economy on barter. And from this side of the Atlantic, barter does indeed seem to be likelier than any other solution.

We’ve seen similar situations before, right there in the Balkans and the former Eastern Bloc. Back during the Cold War, you could get most anything you wanted — if you could get your hands on US dollars. And believe it or not, Marlboro cigarets were the unofficial second currency of communist Romania.

Anyone else see a better out for Greece?