Greece May Introduce Brand New Currency Ahead Of EU Exit

Greece may have to introduce a “parallel currency” if negotiations with the EU fails, the German Finance minister, Wolfgang Schäuble, has said. 

During a private meeting Schaeuble put forward the proposal of a Greek second currency, which would be the initial step in an exit from the eurozone. reports:

Schaeuble is seen as the major hardliner in Greece’s negotiations, one who will demand extensive reforms for any money and is sceptical of the whole idea of bailing Greece out.

The idea Greece would issue some sort of IOU to cover public pensions or salaries has been floated by economists in recent weeks as an emergency measure, should the country run completely out of cash.

The government could issue this “parallel currency” and demand that it have the same value as the euro, but if the public didn’t have confidence in it, a black market could open up. Capital Economics says this could create a “dual pricing system” in which the parallel currency is worth less than the euro, destabilising the whole economy.

Several years ago, during the worst parts of the euro crisis, the threat of a Greek exit from the euro was seen as an immediate problem for the whole bloc. Other European countries feared that a Greek banking collapse could drag the rest of southern Europe with it and destroy the monetary union.

This time, many finance ministers are much less cautious and regard the possibility of a potential Grexit (Greek exit from the eurozone) as much less risky for their own countries. Some German officials have reportedly suggested Greece should be cut out of the currency union like a “gangrenous leg.”

Here’s a snippet from Bloomberg:

Germany is “ready to take this brinkmanship very far,” with Schaeuble in the role of “attack dog,” Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington, said by phone. “The risks of contagion to other euro-area countries from a deterioration in Greece is very low.”

Over the past few days the Greek government has suggested a deal is getting much closer. Greek Finance Minister Yanis Varoufakis even said Monday that he expected a compromise agreement to unlock bailout cash within the week.

But Schaeuble and Chancellor Angela Merkel have poured cold water on those suggestions, saying much more work needs to be done.