The question I often hear is more‐or‐less the following: if Greece were forced out of the eurozone, couldn’t it follow either the Montenegrin, the Ecuadorian, or the Bulgarian examples of successful currency regime change‐overs? Since I participated in the design and implementation of these three change‐overs, I can vouch for the details of just what was involved.
Montenegro — Montenegro uses the euro, but is not a formal member of the eurozone. In consequence, it avoids the moral hazard (read: potential Greek‐like bad behavior) created by the European Monetary Union.
Montenegro’s opportunity for a currency regime change‐over was served up by Slobodan Milosevic in January 1992. That’s when the great hyperinflation began in the rump Yugoslavia. It peaked in January 1994, when the official monthly inflation rate was 313 million percent. For some color, consider that the worst month of Weimar Germany’s 1922–23 hyperinflation saw prices go up by only 32,400 percent. The Yugoslav hyperinflation was devastating. Long before NATO struck Belgrade in 1999, Milosevic’s monetary madness had destroyed the Yugoslav economy.
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In 1999, Montenegro was still part of the rump Yugoslavia, and its official currency was the discredited Yugoslav dinar. But, the mighty German mark was the unofficial coin of the realm.
Montenegro’s President, Milo Djukanovic, knew that the German mark was his trump card. If Montenegro officially adopted the mark, it would not only stabilize the economy but also pave the way for reestablishing Montenegro’s sovereignty. On November 2, 1999, he boldly announced that Montenegro was officially adopting the German mark as its national currency. This was Montenegro’s first secession step — a step supported by the United States and its allies.
The Montenegrin economy stabilized immediately and began its steady growth amid falling inflation. It wasn’t surprising that, in May 2006, voters in Montenegro turned out in record numbers to give a collective thumbs‐down to their Republic’s union with Serbia. Montenegro was once again independent. And on March 15, 2007, Montenegro signed a stabilization and association agreement with the European Union, the first step towards EU membership. Then, on December 17, 2010, Montenegro received word that it was a candidate to join the EU. When the accession process comes to an end, Montenegro will enter the EU with euros in hand. Indeed, Montenegro was euro‐ized from day one.
While the political winds were behind Montenegro’s sails when it adopted the German mark, and ultimately the euro, the political headwinds from Brussels and Frankfurt for such a change‐over in Greece would be enormous.
Ecuador — Ecuador uses the U.S. dollar, but the country is not part of the U.S. Federal Reserve System. Ecuador represented a prime example of a country that was incapable of imposing the rule of law and safeguarding the value of its currency, the sucre. The Ecuadorian sucre traded at 6,825 per dollar at the end of 1998, and by the end of 1999 the sucre‐dollar rate was 20,243. During the first week of January 2000, the sucre rate soared to 28,000 per dollar.
With the sucre in shambles, President Jamil Mahuad announced, on January 9, 2000, that Ecuador would abandon the sucre and officially dollarize the economy. Telephone calls from both President Bill Clinton and then U.S. Treasury Secretary Larry Summers encouraged Mahuad to dollarize. The positive confidence shock was immediate. On January 11 — even before a dollarization law had been enacted—the central bank lowered the rediscount rate from 200 percent a year to 20 percent. On February 29, the Ecuadorian Congress passed the so‐called Ley Trolebus, which contained dollarization provisions. It became law on March 13, and after a transition period in which the dollar replaced the sucre, Ecuador became the world’s most populous dollarized country. And dollarization remains, to this day, highly popular; most Ecuadorians — 85 percent — still give dollarization a thumbs up.
It is difficult to see how Greece could follow in the footsteps of Ecuador. Can you imagine President Obama telephoning Prime Minister Tsipras to announce that the U.S. would back the dollarization of Greece?
Bulgaria — Bulgaria issues its own currency, the lev. It is a clone of the euro. Bulgaria is, therefore, part of a unified currency area with the eurozone, but Bulgaria is not a formal member of the European Monetary Union. In consequence, it does not face the moral hazard problems thrown up by the eurozone. Indeed, Bulgaria must impose fiscal discipline because the government cannot go to the European Central Bank, or the Bulgarian National Bank for that matter, and borrow funds. Not surprisingly, Bulgaria runs a tight fiscal ship and its debt‐to‐GDP ratio is one of the lowest in the E.U. at 29 percent.
In 1997, Bulgaria was in the grip of a hyperinflation that peaked in February, when the monthly rate hit 142 percent. To kill hyperinflation, Bulgaria installed a currency board on July 1, 1997. Under the currency board rules, the Bulgarian lev became freely convertible at a fixed rate with the German mark and it was fully backed by German mark reserves. In consequence, the Bulgarian lev became a clone of the German mark (now the euro).
Bulgaria’s currency board system was endorsed by the U.S. and Germany. The International Monetary Fund even joined the party. The currency board system killed inflation immediately, established stability, and remains the most trusted institution in Bulgaria.
In the event of a Grexit, Greece’s best option to establish sound money and fiscal discipline would be to emulate their Balkan neighbors to the North, and install a currency board that issues drachmas that clone the euro. Greece would remain in a unified currency area with the euro, without the moral hazard problems associated with formal membership in the eurozone. The external political headwinds which would accompany either the Montenegrin or Ecuadorian option would abate. The major political issues would be internal, because a drachma issued by a currency board would require Greek fiscal discipline.