Neither Grexit nor a dual currency will solve Greece's problems

By Jurgen Matthes*

A Grexit or the introduction of a dual currency is not a solution to Greece?s problems. On the contrary, it would be a worst-case scenario for Greece in the short term. Only in the medium to longer term, the resulting devaluation and improvement of price competitiveness would help businesses active in the export and import substitution sectors. For the euro area, a Grexit or dual currency would be a signal that the currency union is not made forever, even if the situation is much different from 2010-2012 as contagion effects to other euro periphery countries hardly exist today.

The negative short-term impact from a Grexit or from a dual currency would push the Greek economy into a very deep crisis and lead to further impoverishment.

The Greek financial sector, which is already rather weak, would be severely affected, particularly by further withdrawals of euros from bank accounts in the course of bank runs (among other aspects). Capital controls can only partly stop this from happening. The problems of the financial sector would lead to a further drying up of credit supply and the danger of bank insolvencies.

The risk of insolvency would go much beyond the banking sector and also include businesses and particularly the state. All private and public economic actors with sizeable debts in euros and under foreign law (debt which could not be converted to the new or dual currency) would suffer from higher debt counted in the dual or new currency. This is so because the dual or new currency would devaluate to a large degree versus the euro. Imagine the balance sheet of a bank or of a company with significant euro debts under foreign law: These liabilities would remain in euro but significant parts of the assets would be...