Could Greece be the first country to formally adopt an electronic currency?
The Greek crisis is not going away in a hurry. Even if the various parliaments and lawmakers across the Eurozone ratify the latest agreement between the Euro Group and Greece, it will be some time – maybe a few weeks, maybe a month, maybe longer – before Greek banks return to normal and capital controls are completed lifted.
Even then, however, there is a view that it is only a matter of time before Greece hits another crisis. As the IMF said this week, “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”
If the penny (or is that drachma?) hasn’t dropped in Greece yet, it never will. The Greeks need to brace themselves. As the Cypriots learned a few years ago, the money Greeks hold in their banks is not necessarily secure, or always accessible. They need to make alternative arrangements.
The possibility of Greeks adopting bitcoins and for these to become the currency of choice may prove to be a red herring. However, the chances of the Greeks adopting a bitcoin type of technology, ultimately supported by their central bank, are high.
First, let’s deal with the red herring. As far as Greece is concerned, the problem with bitcoins lies in precisely the area that advocates of the electronic currency love. The markets control the value of the bitcoin. Governments are unable to control it. If we all traded in bitcoins, governments would not have the option of printing money, or cutting interest rates to save their fiscal skin. The libertarians, the likes of Rand Paul in the US, seem to love this characteristic. For Greece, adopting the bitcoin would amount to jumping out of the euro frying pan, and into the libertarian fire.
The problem with the euro, as far as Greece is concerned, is that the Greek central bank has next to no influence over it. Greece needs a cheaper currency in order to support its exporters and its tourism industry. It needs a terms of trade advantage over fellow euro countries, such as Germany, but no such advantage is possible because it shares a currency with these countries. Iceland, in contrast, was able to bounce back from its own financial crisis partially thanks to a crash in the value of its currency, the krona.
The UK had a similar experience in 1992, with one key difference. The UK borrows in pounds, therefore, its central bank can repay debt by printing money as a last resort. No such luxury applies to Greece. For that reason, if the country did bring back the drachma, which then fell sharply in value, further debt default would be inevitable. If Greece swapped from the euro to the bitcoin, it would be handing over control of its currency from the European Central Bank to the anarchy of the markets. There is no reason to assume that the outcome would be any more favourable.
All the same, the Greeks themselves need to find a way of facilitating commerce that they feel is reliable. For the reason stated above, they cannot rely on the euro.
The obvious solution to a country inhibited by capital controls is barter. It is just that bartering is highly inefficient. Money needs to act as a medium of exchange, a unit of account, and a store of value. It must be divisible, fungible, portable, and must not be degradable. It must also be accepted. Money must have a kind of psychological value.
Above all, money is a substitute for barter.
The Greeks could start trading using ouzo as their means of exchange, but while that may fulfil some of the characteristics of money, it would not fulfil all of them.
Technology may provide the solution, with some form of virtual currency. The block chain system behind bitcoins can help to make a currency safe – and all but impossible to counterfeit. Smart phones and wearable technologies can make a virtual currency highly portable. A virtual currency is clearly fungible, and most definitely divisible.
For such a currency to have acceptance, to have a psychological value, it ideally needs to have some form of backing. For example, one unit of virtual drachma might be equal to a unit of ouzo, or one hour of work at the minimum wage.
We are already halfway there. Companies have started paying their bills with IOUs. It has been mooted that the Greek government may do the same. For that matter, the former Greek finance minister Yanis Varoufakis did previously suggest that Greece could launch a virtual currency using block chain technology to act in parallel with the euro.
When controls are holding back commerce, the markets can behave like water in a leaky cauldron and find the way out. If capital controls continue – and when they are lifted the Greeks retain a fear that they may return one day – the Greek people will find their own solution. In the age of smart phones, wearable technology and block chain technology, such a solution may well involve a virtual currency. The Greek government could ultimately support such a move. Indeed, it could define the base value of this new currency. Greece may eventually prove to be the world’s first country to formally adopt a currency that is solely electronic.