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How Greece can leave the euro without leaving the euro

Deutsche Bank’s Mayer has a plan for Greece to take a ‘temporary breather’

Thomas Mayer, chief economist at Deutsche Bank, has a plan for Greece.

Describing the nation as the Groundhog Day of the sovereign debt crisis, he said: “Every day you wake up and go outside and there it is again – Greece.”

However, Mayer claimed it is possible for the country to “take a breather” from euro membership and devalue without the trauma of a full euro exit.

“Greece has brought us the crisis-management mechanism,” he said at the International Capital Market Association AGM in Milan on Friday. “It is temporarily possible to step out of the euro and to take a breath.”

The conundrum the country faces is that 80% of the Greek population wants to stay in the euro but are not prepared to adhere to the austerity programme. Mayer said this is because they believe the troika will keep paying regardless. “They are wrong,” he said. “The troika seems to be prepared to pay out money for external debt service – as we saw in May – but not for current expenses.”

Greece’s former prime minister Lucas Papademos has suggested the Greek government only has sufficient resources to meet its obligations for another two months. So what happens when Greece runs out of money?

Mayer suggested that the Greek government will issue IOUs to its civil servants rather than pay them in euros. Buyers will then emerge for these IOUs at a discount – and immediately you have a parallel currency in circulation, the geuro. There will be no formal exit from the euro – no one wants that – but by issuing IOUs the Greek government has created the geuro.

Mayer suggested that workers, such as civil servants, who are being paid in geuros would likely take a lower-paying job that would enable them to be paid in a hard currency – such as working as a waiter in a hotel that has revenues in hard currency.

In this way, the hotel can lower its wage costs and thus cut its prices and boost business. All of a sudden the geuro starts to look a bit like the Zimbabwean dollar.

“The Greek government does not want this and will use hard currency [generated by growth in hard currency businesses] to buy back geuros and re-establish full membership of the eurozone,” said Mayer. “In this way, it is possible for Greece to devalue by temporarily stepping out of the euro without there being any formal exit.”

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