Can a Parallel Financial System Solve the Greek Crisis?

In a new article, Dimitri Papadimitriou looks at the possibility of creating a parallel financial system — dubbed the “geuro” (following Thomas Mayer) — to help rescue the Greek economy:

Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance.

The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros.

Foreign trade would still require euros, which would remain in circulation, and Greece’s private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro.

There’s a certain view that, if Greece weren’t in the eurozone, the ideal solution would be to devalue its currency and grow its way out of depression through exports. But since Greece doesn’t have its own currency, we’re left with “internal devaluation” — trying to boost exports through reducing unit labor costs. As Papadimitriou and some other members of the Levy Institute’s macromodeling team (Michalis Nikiforos and Gennaro Zezza) have pointed out, that internal devaluation strategy isn’t working — even though Greece “succeeded” in reducing its relative labor costs.

But what if it were possible for Greece, while remaining firmly in the eurozone, to create a financial instrument (the geuro) that would effectively operate as a parallel currency? Would export-led growth through devaluation of the new currency then become a viable possibility? The answer, according to Papadimitriou, is no, not really:

Why not stress exports? Price elasticity in Greece’s trade sector is low, our analysis shows, which explains why there hasn’t been much evidence of success in export growth. Of course exports are important, but even China, with its gigantic export-guided economy, has recognized the need to increase and stabilize domestic demand.

The value of creating an alternative currency like the geuro is not that it would enable devaluation, but that it would allow Greece to regain a measure of control over its fiscal policy: it could be used to fund the sort of stimulative policies that aren’t forthcoming under the reigning austerity regime. Papadimitriou explains in the article that a geuro-funded direct job creation program targeting 550,000 jobs (not counting the indirect employment creation) could boost GDP in Greece by 7 percent at a net cost of around 3.5 billion geuros per year. And as he points out, “there would still be a sizable euro surplus.” Read the whole thing here.

The article is based on the recent strategic analysis for Greece by Papadimitriou, Nikiforos, and Zezza, which uses the Levy Institute’s stock-flow consistent modeling approach.