Michael Saunders is a senior economist at Citibank, the world’s second largest currency trading bank. In a recent Daily Mail article, he said the likelihood of Greece leaving the European Union in the next 12 to 24 months, is now between 50 and 75 percent certain, and suggests it will likely occur January 1st of 2013. One of the major stumbling blocks to Greece leaving the European Union has been the lack of a currency. Greece adopted the Euro over ten years ago, and to start a new currency is no small matter.
A new currency would call for volumes of bank notes be made, good timing in its implementation, and above all secrecy. Greek citizens are already moving vast amounts of money out of Greek banks. If it got out that a new currency was coming, even greater amounts of money would leave the banks, risking their collapse. What if a currency could be adopted overnight? Brazil did just that in 1994, when they introduced the first “virtual” currency through the “Real Plan”.
Brazil, for over a decade was experiencing rampant inflation that peaked at over 960% . Several previous governments were unable to tame the devastating effects inflation can have on an economy. Prices for goods and services, such as groceries, changed multiple times a day. This encouraged people to spend money as soon as they got it for fear it would buy less if they waited.
Then President, Itamar Franco appointed Fernando Henrique Cardoso as finance minister of Brazil. Fernando assembled a team and put into operation a plan to introduce a virtual currency. This virtual currency was a concept, not a piece of paper. He set up the use of a Unit of Real Value (URV) relationship to prices and contracts.
The URV indicated a value for everything that would remain constant. They put the URV system im place over a weekend and on Monday, Brazilians conducted all transactions in URVs; from employee payroll, to products in stores, the price of gas, and the cost of services. The URV functioned as an internal exchange rate for the currency and kept prices stable. Once Brazil implemented the URV , these price changes stopped. After several years of allowing the economy to stabilize, they introduced a physical currency, and called it the Real.
Although they priced everything in URVs, financial transactions were actually paid for in the country’s currency (the Cruzeiro), which did continue to change with respect to other currencies. But, within a local economy, prices stopped changing, and people worried less. This arrangement allowed prices to stabalize in the midst of high inflation and had a calming effect on the country’s economy. Three months after Brazil introduced the URV , inflation had fallen from 15% per month, to 2% per month. Inflation went almost to zero over the following six months.
To be sure, getting a new currency will not curtail the difficult time Greece faces upon leaving the European Union. Once Greece leaves, presumably setting the value of its currency (or virtual currency) at par with the Euro, that currency will rapidly deflate against other currencies. This will make foreign goods very expensive to Greek citizens, but will also make Greek goods very attractive to other countries. The latter, is the one silver lining that may help Greece in its road to recovery. By increasing its foreign trade, Greece can bring much-needed revenue and jobs back into the Greek economy.
It will be a long road whether Greece leaves the EU or stays. Staying, it will have to rely on continued EU bailouts; while leaving, it must work towards building its foreign trade, and by extension its job base.