Although this may sound like fantasy economics in the UK (for it is), in certain parts of the world it is fast becoming a reality. President Mugabe’s government has announced that the Zimbabwean dollar would be steadily phased out to be replaced by US dollars.
The reason for this is hyper-inflation, which has precipitated a situation which is fast becoming untenable. The last bank note to be printed by the Reserve Bank of Zimbabwe was a 100 trillion Zimbabwean dollar bill. Unfortunately, it isn’t even enough to pay for a bus fare for a week.
Umm, no, not really. No one’s been using the $Z since 2009.
The current deal is simply to allow people who’ve had money locked in bank accounts to finally liquidate them into US $.
Seriously, is all economic journalism to be this bad now?
The question of course is whether falling out of the euro would lead to a return to the Drachma, or some new form of currency? Some 58pc of Syriza supporters in a recent poll said they would rather return to the Drachma than remain in the euro. Maybe so but, having become the first country to smash out of the eurozone, what would the fate of the Drachma look like?
Data from the World Bank show Greece’s inflation rate peaked at 4.7pc in 2010, and has since slumped into deflationary territory. But with the euro gone, and with prices and trading relationships uncertain, it is more than likely that inflation could spiral out of check.
Depends how much cash Syriza prints, doesn’t it? Inflation always and everywhere being a monetary phenomenon?
I still have one of those uncirculated 100 trillion zim dollar bill. You too can buy them from amazon.com.
Even if they start printing Drachma, a lot of people will continue to use euros. All the tourist places will accept euros, and in many areas tourism is the only industry. So is there any point in printing drachma if nobody is going to use them? Could Greece become like Panama or Ecuador which use the U.S. dollar?
I’ve a few friends in Greece who are in the tourist industry and they’re proying for a return to the Drachma on the basis that, after the inevitable devaluation, Greece will become a very cheap tourist destination, much as it was before joining the Euro, and they’ll be inundated with folk from the rest of Europe.
Can’t say that I can fault their argument.
An economy running on both euros and drachmas might be a perfectly sensible option. We Hayekians ought to approve of the experiment. Of course, its being the Greek govt, they’ll probably cock it up.
@Pogo
Cheap? Sure the tourists flock in, but suddenly the price of capital goods you inevitably have to purchase from some place abroad will skyrocket.
@Mario… True, but the biggest cost to most “touristy” organisations is staff and food – both of which will be locally-sourced and are continuing costs, not one-offs.
…and I would add, at least the initial capital stock is already in place: hotel rooms, kitchens, bars, etc. Tourist operations will see a mixed Drachma / Euro cash inflow (I imagine they will quote in both currencies), and a Drachma outflow for staff and food. The purchasing power of the Drachma outflow will be much less than the current Euro outflow for the same labour and food inputs (although non-local booze will require Euros, I guess), so their initial operations will be cash-positive. As is the case for most sun-and-fun third-world tourist destinations, their competitive advantage will lie in on-going devaluation to keep their input costs low. Most tourist capital stock is for buildings, which again requires (mostly) local inputs, particularly for construction labour. Bits and bobs have to be imported (elevators, TVs, bar and kitchen fittings, etc) but I suspect the positive cash flow will fund those imports, particularly if the tourist operators carry their cash balances in Euro (or dollars) in locations outside Greece to avoid both devaluation and confiscation / nationalization. It will be interesting to see if Syriza apply capital controls in a Drachma economy.
In light of Zimbabwe ‘ s experience, let us consider Richard Murphy/MMT on tax:
“Tax is in fact paying back the money government has already spent
You don’t use tax to fund government expenditure; you use it to dampen inflation
Tax is a mechanism the entrepreneurial state uses to drive growth
Stick pencils up your nose and cry MUGABE”
Euro weakness will provide at least some relief for Med tourism.
One side affect of the strong Euro in Cyprus was the significant increase in all-inclusive holidays. Whilst enabling operators to compete more effectively, they’re not good for local businesses and make for duller holidays.
And let’s not blame it all on Med fecklessness. Offering bribes to join, as the EU certainly did to selected Cypriot individuals, was beyond the pale.
Used to know this Quinn, in the late nineties. Likeable cove, gloriously camper than a row of tents. I’ll stand corrected, but I’ve a feeling his degree was in English.
Minor issue. Plane lands – where is it getting fuel from? Who imports the fuel for the vehicles? Expensive imports?
Who buys parts for vehicles? Tourists do not just sit in hotels.
Martin: Lots of tourist visits to Cuba, considering that the natural (and largest) market is closed to them. Somehow the planes land and then take off again, and somehow the tourists get from the airport to the hotel / resort and back. I imagine that the Greek tourist industry is better-positioned than the Cuban, at least until a full normalization of US/Cuba relations.