Greece 'Should Follow Bulgaria's Currency Model in Case of Grexit'

Southeast Europe | July 12, 2015, Sunday // 10:46|  views

Photo by EPA/BGNES

Bulgaria is the better currency model for Greece if the country slides towards Grexit, renowned economist Prof Steve Hanke says.

In an article for the Politico magazine, he opines that the best option of Athens "to establish sound money and fiscal discipline" in the event of Grexit "would be to emulate their Balkan neighbors to the North, and install a currency board that issues drachmas that clone the euro".

Hanke, a professor of Applied Economics at Johns Hopkins University in Baltimore, draws a comparison between currency regime change-overs in Bulgaria, Montenegro, and Ecuador, where he actively took part in the implementation of these.

In his words, the second or third option would be both accompanied by "political headwinds".

Hanke advised Bulgaria's President Petar Stoyanov (1997-2002) on the introduction of the restrictive monetary mechanism in 1997 that ended a spiral of hyperinflation. He also worked with the President of Montenegro and the Economy and Finance Minister of Ecuador roughly at the same time.

Starting with Montenegro, which uses the euro but is not formally part of the Eurozone (and "in consequence avoids the moral hazard... created by the whole European Monetary Union"), he argues "political headwinds from Brussels and Frankfurt [the EU Commission and the European Central Bank respectively] for such a change-over in Greece would be enormous".

Ecuador, on the other hand, has been using the dollar (despite not being part of the US Federal Reserve System) since 2000, after a failure to  safeguard the value of its previous currency, the sucre. Dollarization helped the country's financial system and remains "highly popular" to this day, with 85% of Ecuadorians supporting the dollarization.

This is difficult to imagine with regard to Greece, Prof. Hanke notes, adding: "Can you imagine President Obama telephoning Prime Minister Tsipras to announce that the US would back the dollarization of Greece?"

Bulgaria, on the other hand, has a currency pegged to the euro and is "part of a unified currency area with the Eurozone" without being a formal member of the European Monetary Union and consequently "does not face the moral hazard problems thrown up by the Eurozone."

"Not surprisingly, Bulgaria runs a tight fiscal ship and its debt-to-GDP ratio is one of the lowest in the EU at 29 percent," he reminds, also recalling the story of Bulgaria's hyperinflation period in the mid-1990s which pushed it to install a currency board in 1997, with the lev becoming freely convertible at a fixed rate with the German mark and fully backed by German mark reserves.

"The currency board system killed inflation immediately, established stability, and remains the most trusted institution in Bulgaria," he adds.

The full article is available here.

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Tags: Tsipras, greece, Bulgaria, Montenegro, Ecuador, Grexit, Eurozone, dollar, US, EU, lev, sucre, Steve Hanke, Hanke


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