When Will Countries Drop The Euro?

Greek reversion to drachma easier than euro conversion, say analysts

If Greece were to leave the eurozone it would have to establish a new currency in record time; analysts explain how the process would be simpler today due to technological advances
The possibility of Greece exiting the euro is met with abject terror from economists worldwide. But if the struggling nation were to pull the plug on the single currency and decide to return to the drachma, economics aside, the process would be startlingly simple.

"Converting national payment systems is of course not easy, but it is probably easier than one might think," says an analyst from a central bank in Europe. "It can be less complex than the introduction of the euro to go back to the drachma, if the Greeks make smart decisions."

Michael Lewis, a senior consultant at Electronic Payments & Commerce, agrees. "The actual process of re-conversion back to a "new drachma" would be disruptive but not too difficult technically," he says.

The first thing the Greeks should ideally do would be to decide on a 1:1 exchange rate between the euro and the re-introduced drachma or other new currency. Clearly this would face extreme opposition, but in terms of the easiest route to changing the currency, this would be the best policy.

"It will be easier if the Greeks would change for example at January 1, 2012, 0:00 hours at parity, meaning one new drachma was worth €1. Then nothing has to change in the electronics except the word euro into the new drachma," an analyst says.

Making the choice to impose a level exchange rate initially would solve one of the biggest problems the eurozone faced when the euro was introduced, when all the national currencies had different rates, causing all manner of payments issues.

"For things like salaries and shop prices, it is best to make the exchange 1:1, so you don't have to re-price all your products and cash registers can function as they are," explains an analyst. "The prices will of course rise very quickly with inflation, but you wouldn't have to alter all the payments systems, you wouldn't have the complex dual pricing period we had with the introduction of the euro."

Naturally, soaring inflation would appear very soon in this scenario, likely within minutes of the change, which brings its own difficulties when it comes to exchanging the cash in the country

The Central Bank of Ireland has said it is not printing Irish punts and is only printing euro.

It is understood that the Central Bank is not in talks with any private printing companies regarding evaluating the need for additional capacity to produce new currency.

In recent weeks, British Chancellor George Osborne said his government had contingency planning in place in the event of the break-up of the euro.

It is understood that authorities in Ireland have given thought to plans in the event there is any significant change to the single European currency.

However, the official position is that remaining within the euro is the only option being actively considered by policy makers and the Department of Finance has not confirmed nor denied that there are any contingency plans in place.

My View:

Well clearly the Central Bank of Ireland is not printing punts just in case.

How do we know?

Because they said so!

You can always trust your friendly neighborhood central banker.

But more seriously, we should make some preparations in the event of a surprise Euro departure.  

One strategy is to have access to physical currency outside the banking system, in a safe or some secure place.  A safety deposit box may be OK, but in an extreme event who knows what emergency legislation may pass to restrict access.

Another strategy is to have a supply of precious metal coins in a secure place.  Again, in an extreme event, authorities may try to restrict their use also.

A third strategy is to have a supply of commonly needed non-perishable goods on hand to trade for other goods and services.  This is a more desperate strategy, but could be effective for a short term disruption.

Finally, having a one month supply of dried and canned food and some fresh water stored in sanitary containers would be wise.

Central bankers will not tell us if they have a contingency plan because, with fractional reserve banking, there are not enough physical currency notes available to meet withdrawals in the event of a run on demand deposits.

It is my view that Greece is most likely to leave the Euro first as its political atmosphere is quite electric.  For practical reasons, the best time for a currency transition is during a major holiday.  Some dates that meet this criteria are listed below.

Potential currency transition dates:

December 24, 2011 to Jan 1, 2012

April 5 - 9, 2012 Easter

May 17 - 20, 2012 Ascension day

November 1- 4, 2012 All saints day

December 24, 2012 to Jan 1, 2013

Given the extreme nature of austerity that is developing in southern Europe, I would be surprised if Greece manages to stay in the Euro past Easter or perhaps May.

Several other nations are likely to follow in rather short order once Greece leaves.

Ireland, Spain, Portugal, and even Italy are the primary candidates.

Deficit Measures to Ban Cash Transactions Over 5,000 Euros

As this headline from May 2010 shows, Italy has been worried about the amount of physical cash in transactions for over a year.

If you are living in Europe, have you personally prepared for a disorderly exit from the Euro in your country?