It’s no wonder that Dr Varoufakis was quietly preparing a parallel currency. He was trying to safeguard Greek sovereignty.
Even Julius Caesar knew that no government is really sovereign unless it has its own currency. If you use someone else’s then ultimately you are at their mercy, economically at least. Without its own currency, a country has no means of safeguarding its payments system. The reason is very simple. The little pieces of paper that we call money (along with the electronic bits of information that are central bank reserves) can only fulfill that function because we believe that they will. If ever we were to lose faith that money is money, the monetary system is pretty much doomed — valuable pieces of paper and electronic bits become worthless, and life gets pretty complicated since virtually every transaction we make is made with money.
Our faith in the currency ultimately comes from the knowledge that our government will do whatever is needed to safeguard the monetary system and has the power to do it. In Greece’s case, as became clear during the last few months of bailout negotiations, the government could not credibly backstop the Greek banking system, and so people lost faith in their money (the electronic bits used by banks) and a bank run ensued. That is why the run continues today. The Greek people just can’t be sure that a euro deposit in the bank today will be a euro deposit in the future and the Greek government is powerless do anything about it. Unless, of course, it is willing to cede sovereignty to the Troika.
While this is an immediate problem for Greece, it is ultimately a problem for every euro area member. It means that no nation is truly sovereign. Torrens reckons this is the reason why Greece captivates us all and explains the discussions about Greek democracy and sovereignty on the web. It also explains why, deep down, we all understand that Greece may be better off with its own currency.
The flip side of the problem is that there is no supra-national government that can legitimately supersede the authority of any euro area national government. People legitimately look to the only supra national organisations with power and credibility to do something. But no matter what they say, the ECB and IMF do not have the mandate to “do whatever it takes”. They can’t recapitalize banks, or restructure debt, or change laws. Their policy instruments simply weren’t designed to safeguard the entire monetary system of a whole country. As Mario Draghi said in the last ECB press conference, Emergency Lending Assistance (ELA), was designed to deal with runs on individual banks, not a systemic failure at the national level. Likewise, on of the main lessons from the 1997 Asian crisis, the IMF can lend to finance adjustment, but that commitment alone cannot stave off capital account crises.
Nevertheless, when a monetary crisis (like that happening in Greece) occurs the pressure to resolve it falls on the ECB and IMF to try. The sad fact, however, is that by trying, and not succeeding, the credibility of these vitally important institutions is eroded. (If you don’t think so you just need to watch the press conference. Poor Dr Draghi was like a deer caught in headlights — having to justify to the press corps why he had failed to prevent the imposition of capital controls in Greece, which for all intents and purposes, amounted to a temporary, albeit, partial, suspension from the eurosystem, and a failure to preserve the integrity of the European monetary system as a whole).
The quandary that Europe finds itself in is that the loss of sovereignty that a country suffers from having no currency of its own can only be mitigated if other countries are willing to cede a little more of their their own to allow supranational institutions to do more to act in the interests of Europe. At the moment the members of the main decision making bodies — the Eurogroup of finance ministers and Euroarea leaders only have incentives to act in their national interests.