GREECE IN A MONETARY UNION: Lessons from 100 years of exchange rate experience

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30 Mar 2016

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New research adds a historical and regional dimension to the current debate on the Greek debt crisis. In a study to be presented at the Economic History Society’s 2016 annual conference in Cambridge, Mathias Morys analyses 100 years of exchange rate experience – from the foundation of the National Bank of Greece in 1841 to the Second World War – of Greece, Bulgaria, Romania and Serbia/Yugoslavia.

His research finds surprising parallels to the present: repeated cycles of entry to and exit from the dominant fixed exchange rate system of the day; government debt built-up and default; and financial supervision by West European countries. He concludes:

‘The long-run record of Greece suggests that the perennial economic and political objective of monetary union membership can only be achieved if both monetary and fiscal policy is effectively delegated abroad.’

‘Understandable public resentment against ‘foreign intrusion’ might need to be weighed against their potential to secure the long-term political and economic objective of exchange rate stabilisation.’

Why was membership in a monetary union so short-lived in international comparison? Greece and the other South-East European (SEE) countries conducted more often than not fiscal policies inconsistent with exchange rate stability. Persistent budget deficits were either monetised (‘printing press’) or financed through (international) bond markets.

Joining the pre-1914 gold standard monetary union required phasing out debt monetisation, yet this proved elusive for decades; only Romania was able to reform its fiscal institutions and avoid using the ‘printing press’ on its own.

In all other cases this was achieved only under the financial supervision arrangements that Greece and Serbia entered into after their defaults (and Bulgaria accepted ‘voluntarily’), when creditor countries prohibited debt monetisation, improved tax collection and gave controlled (and hence sustainable) access to international capital markets. It was this much improved institutional environment that allowed Greece, Bulgaria and Serbia to stabilise their exchange-rates in the early twentieth century.

Similarly, exchange rate stabilisation in the 1920s was achieved by international loans that came with the explicit prohibition of debt monetisation (in an attempt to secure gold standard adherence and hence repayment of the loans); once financial supervision receded (with the disintegration of the gold standard in 1931/32), budget deficits were again routinely monetised.

Fiscal institutions have remained weak in the case of Greece and are at the heart of the current crisis. A potential lesson for today might be that the EU-IMF programmes – with their focus on improving fiscal capacity and made effective by conditionality similar to the earlier SEE experience – remain the best and perhaps only guarantor of continued Greek membership of the euro area.


Any lessons for today? Monetary union membership in Greece and South-East Europe between European aspirations and economic reality, 1841-1939

Mathias Morys and 078186 25474 (mobile)

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