Debt crisis: Two currencies for the most indebted states

29 February 2012 – Eesti Päevaleht (Tallinn)

Rather than leaving the eurozone, the most indebted countries would do better to adopt a second, national currency. It would be circulated alongside the single currency, on the model of what was practiced in the former Soviet-bloc countries at the time of independence, suggests Viljar Veebel, an Estonian political scientist.

The situation of Greece, Portugal and of several other peripheral states regarding exports, tax-collection and competition has only gotten worse in spite of two years of efforts and expense.

Given those facts, there are not many alternatives. First, the indebted states cannot abandon the single currency because that would affect the creditors who expect to be reimbursed in euros. In addition, the indebted countries cannot guarantee the normal operation of their businesses because there are no euros in circulation and they cannot print any themselves.

That leaves only two options. Either long-term loans, in euros, can be solicited from the International Monetary Fund and the European Union, or a national currency can be introduced (drachma, escudos) in parallel, that governments can print themselves if need be.

The first option, today considered the most likely, can only function on the condition that the "well-behaved" exporting EU countries such as Germany, the Netherlands and Luxembourg, want to pour money constantly into the peripheral countries. Yet it could be that the latter do not have the motivation needed to improve the situation.

The other possibility would be to put into circulation a national currency, alongside the euro. This would also benefit creditors because debtors could more easily pay back their euro debts using funds from exports and from European subsidies. The national currency would be limited to domestic uses.

Making the Greeks and the Portuguese happy is not today's goal

This solution also guarantees an internal stability because the salaries for teachers, fire fighters or doctors would be paid in the national currency, of which more could be printed if necessary. The exchange rate between the euro and the national currency would fluctuate, which would probably lead to an annual fall of 20% in purchasing power and in real wages.

This situation would not make the Greeks and the Portuguese happy but that is not today's goal. Rather we need Southern Europeans, who, although dissatisfied and hungry, decide to go to work for a wage that they have until now considered insufficient. For us, the real value-added would be to avoid having to pour our euros into the European aid fund and to avoid a devaluation of the euro by printing too much of it.

This model has already proved its worth. We can take as an example our experience at the end of the 1980s and the early 1990s, when, alongside the rouble, [the currency used in Estonia during the Soviet era], and before the introduction of the crown [in 1992], we also had dollars and Deutschmarks. That was also the time when, under the influence of the parallel currencies and high inflation, there was a redistribution of resources and of expenditure in society.

For a part of the population this was difficult, but the facts are that the schools and the hospitals remained open and nobody burned any cars; that the country was governed and the economy soon adapted to become more competitive and export-oriented. In just a few years, Estonia became, in the eyes of foreign investors, one of the most attractive countries in the world.

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