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German Euros and Greek Euros: Are They Really The Same?

By Peter Martin

Just like the US dollar, the euro is a single currency which is shared by 19 countries of the European Union.

That’s the official fiction. If the powers-that-be in the EU had really wanted it that way they could have had it that way. They would have needed only one central bank. There would have been one design for each of the various banknotes and one design for each type of coin.

Instead there are multiple country based designs for both notes and coins. Notes carry a serial number including a country code. There is one national central bank (NCB) per country plus we have the European Central Bank (ECB). Whereas most currencies can be considered to be a two layer structure, the euro has a three layer structure. It can be best understood as a collection of tightly pegged but slightly different euros. The Bank of Greece (their central bank) can still print and create euros which they normally do with the approval of the ECB. That approval has been recently withdrawn. So what happens if they create euros without the ECB’s approval? The ECB can only refuse to guarantee them on a par with other euros so instantly the Greek euro would float.

All Greek banks whether domestically owned, or foreign owned, rely on the BoG for their liquidity. So the closure of the Greek banks, including all foreign owned ones, has nothing to do with their financial viability, but everything to do with the inability of the BoG to provide the euros they need to function. If the euro were a truly single currency the ECB would not be able to isolate Greek banks and their account holders in the way they have. The banks could open tomorrow if the BoG started to create euros again. And indeed they should, preferably with the support of the ECB. The ECB has a duty to all Greek euro holders just as the US Fed has an obligation to all holders of US$. It would be inconceivable that any political dispute between the Federal government and, say, the city of Chicago would result in the residents of that city being denied full access to their bank accounts.

If the BoG issued euros without ECB approval then we’d have a new currency. The Greek euro. Just what would be the status of all previously issued euros, both digitally and physically created would depend on the willingness of the ECB to guarantee them. It would be legally messy but it is a quick solution to get that new currency.

In the EZ, bank depositors, except of course in Greece at the time of writing, can costlessly shift euro deposits from one bank to another anywhere in the zone. Any depositor of an Irish bank, say, can move their money to a German bank. This requires the Central Bank of Ireland to obtain reserves that get credited to the Bundesbank, the central bank of Germany. If deposits tend to flow from the poorer nations, to Germany in particular, their central banks go ever more deeply into debt to the ECB to obtain reserves that accumulate in the account of the Bundesbank.

As recent events in Greece show, it makes no sense at all for anyone to hold any amount of money in the peripheral banks. The sensible thing is to shift it to a German bank for safe keeping. This is not doing the Germans any favours. It is simply the best way of forcing those most in favour of the euro to accept full liability for euros held by all Europeans. So. logically, nearly all euros should end up being German euros anyway!

Is this yet another fundamental flaw in the architecture of the eurozone? The ECB has to guarantee the liabilities of the peripheral NCBs to hold the system together but what if any country defaults? They will be rid of their National debt at a stroke and can then start afresh with a new currency. The ECB ends up with the bill, which means the rest of the eurozone. Ultimately if everyone else defaults it is Germany, or the last country left in the system, which has to pick up the tab for everyone else.

The Germans may now think their political blackmail has done the trick and will solve the problem. If they do they are kidding themselves. Even if the Greek government manage to implemet their immediate legislation, which I expect it will, can anyone really believe it will be able continue to govern for any length of time in a way for which it has no political mandate? Especially when the voters have been asked and given their explicit verdict in a referendum? It is only a matter of time before, we see the inevitable failure of this so-called agreement. The Germans should be more worried than ever at the prospect of Greece defaulting to be followed by whoever may be next, then whoever is next after that. At the first sign of any repetition of the Greek experience, savers in the less safe regions of the EZ will, if they are sensible, shift the bulk of their savings out of their local bank and into German euros. They should make plans for doing that now, while there is still time.

Peter Martin blogs on his own site; Modern Monetary Theory: Real Economics



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  1. stephentardrew

    Very much what I have been reading this is no solution at all. It seems inevitable that there will be another crisis and the UE has trapped themselves behind a wall of belligerence. Sooner or later they either have to reduce the debt or assist Greece to leave in a managed departure. Anything less is just circular repetition of the status quo which will just worsen the situation. The EU is battling to cover up just how vulnerable they are.

  2. Kizzmett

    I fail to understand how – or why – the EB, IMF and German Finance Minister think implementing more of the austerity measures that reduced the Greek economy and thereby Greece’s ability to repay loans will work any differently this time around. Am I just thick or is there an absence of logic?

    I did wonder how a different currency could be implemented – my thanks Peter for explaining in layman’s terms how it would work.

  3. eli nes

    the first clear story on the euro but, as a simpleton who cannot understand why somebody is playing footsie with their dax down is part of every bulletin, is the weird happenings not really about the power of the banks?
    In Australia labor guaranteed our deposits during the GFC but other countries covered the banks and their rich investors and are still suffering for the banks greed and their politicians mistakes?
    With the rabbutt ruining labor’s AAA economy if another round of world economic turmoil occurs who would like this government in charge?

  4. Paula Fairbairn

    Bail-ins were discussed at the G20 as a tool for the next crash. Joe Hockey does not disagree.

    The prospect of printing euros was discussed in the Greek parliament. Tsipras did not agree. Could this be why Voufarakis quit?

  5. clarelhdm

    Part of the deal is that that an European agency will take control of Greek assets, so will effectively end Greek sovereignty of its own country. They want to make Greece pay by destroying them, it seems

  6. Harquebus

    When governments can print their own fiat currencies at will, they will and always have done and always with the same result.

  7. Neil of Sydney

    With the rabbutt ruining labor’s AAA economy

    That is not correct. We lost our AAA credit rating in the late 1980’s under Hawke/Keating. Govt debt went from 6% of GDP in 1983 to 18%of GDP in 1996 under Labor. It was not until Costello took govt debt back to 5% of GDP that we got our AAA rating back. Once you have lost your credit rating you have to reduce debt to get your rating back. That is something Labor could never do.

  8. Neil of Sydney

    Your wording is just biased.

    No.I was commenting on the falsehood that it is Labors AAA economy. We lost our AAA rating under Hawke/Keating. It was not until Costello got our govt debt down to 5% of GDP after Keating took it to 18% that we got our AAA back.

    I have never seen a Labor govt since 1980 either State or Federal pay off any debt. Labor just creates debt. If they get back in they will bring in policies to head us in the direction of Greece.

  9. totaram

    “Labor just creates debt. If they get back in they will bring in policies to head us in the direction of Greece.”

    Ha!ha! You obviously understand nothing about fiat currencies. No one on this blog is going to waste time trying to explain.

  10. petermartin2001

    Thanks for your comments.

    I’ll just round up some of the points that I can answer.

    “When governments can print their own fiat currencies at will, they will and always have done and always with the same result”

    The results of governments running fiat currencies are not at all the same. All modern day currencies are fiat. We can all think of examples of well run and poorly run currencies.

    “We lost our AAA rating under Hawke/Keating.”

    We have to remember that all the main ratings agencies gave the tick of approval to Enron -rating them investment grade AA or better. So we really have to ask if they know what they are doing.

    The Australian government can never involuntarily default on any debt it issues in Australian dollars. Its credit rating has always to be AAA providing that it doesn’t borrow in a foreign currency. It can spend too many Aussie dollars and create too much inflation but that’s all. We don’t need a rating agency to advise on inflation. That’s freely available information expressed as simple percentage.

    ““ Labor just creates debt. If they get back in they will bring in policies to head us in the direction of Greece .”

    Greece has a problem because it uses a foreign currency. All sovereign governments create debt. The Australian government is an issuer of currency. If it isn’t in debt it has issued anything! If there were no Aussie dollar debt we’d have no financial assets and we’d be reduced to a barter economy or we’d have to use Kiwi dollars. Can the debt and deficits be too high? Yes. When inflation is too high that’s the time to be considering scaling back on the spending.

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