Greece's First 'Grexit'
WHY YOU SHOULD CARE
Because if Greece got booted from a single currency before, it could happen again.
By Ulli Kulke
When the European Central Bank recently threatened to turn off its funding tap to Greek banks, one proposed solution sounded laughable, even absurd: “Then we’ll print up to 100 billion euros ourselves,” said Greek politician Rachel Makri. Yet the Greeks had actually implemented a similar plan once before — and, in 1908, they had to leave a single currency as a result.
Indeed, 2015 marks 150 years since a kind of forerunner to the euro was launched in Paris in the Foreign Ministry’s guesthouse. Top diplomats from countries that wanted to join the Latin Monetary Union — as it was known back then — were invited. According to Luca Einaudi with the Joint Centre for History and Economics at the University of Cambridge, the union was part of Napoleon III’s quest for supremacy in Europe. (He had been elected president, then staged a coup d’etat to become monarch, but still believed Europe’s weak could benefit from a single currency if everyone joined.)
Keeping the Union together was “little more than a ploy to avoid the forced redemption of those coins if a member state left.”
When representatives from the founding countries of France, Belgium, Italy and Switzerland met up on the Quai d’Orsay in November, they agreed that each country’s coins should be made using a standard amount of gold and silver as per the French franc, on which the Belgian and Swiss francs as well as the Italian lira were based. The relative value of gold to silver was set at 15.5 to one, and leading banks from the four countries agreed to accept foreign coins at the same rate as domestic ones so that other banks could join without risk.
Here’s how it was supposed to work: All four currencies were meant to circulate in all four countries. For example, Swiss francs would be sent back from France and changed back into French francs, and the number of coins produced was meant to reflect the countries’ population figures, with monetary growth increasing accordingly. Broadly speaking, a single currency was created that was similar to today’s euro. The only formal difference was that the various countries retained their currencies’ names. (Unlike today, they didn’t just use logos to show country of origin.)
The Union invited other states to join as well, and Greece followed as the fifth country in 1868. It took a few years for the country to be recognized as a full member. Even then, while Greece accepted the other currencies, the Greek drachma wasn’t valid in partner nations, which reduced Greece’s participation to very little, Einaudi notes. Gradually, Greece became something of a fifth wheel. It was a country with little to offer economically. Its exports amounted to barely half of its imports and consisted almost entirely of currants, which at the time were subject to severe price fluctuations. Greece stumbled through one currant crisis to another. The state was heavily indebted, and any money it did have was poured into an army that had a top-heavy hierarchy full of expensive generals and officers.
In 1893, President Charilaos Trikoupis declared, “Regretfully, we are bankrupt.” He halted payments to Greece’s creditors — Germany, France and Great Britain — although foreign financial oversight along with debt restructuring and interest rate reduction was the norm in Athens back then. Greece’s bankruptcy “destroyed the country’s reputation as a borrower” for a long time to come, according to a report by the Bank of Greece. (Yes, some things never seem to change.) In 1908, Greece was officially booted from the Union — the first “Grexit.” And by World War I, the paper drachma had depreciated more than 90 percent, according to Einaudi.
The country later rejoined its former members, though wartime turbulence had such an impact on the precious metal markets that monetary values had to be constantly readjusted, and they also varied from country to country. As a result, a single currency was virtually inconceivable. In addition, there was no central supervisory authority like the European Central Bank to control the currency’s circulation and look into irregularities. In the end, reads a report from the Review of Development Finance, keeping the Union together was considered “little more than a ploy to avoid the forced redemption of those coins if a member state left,” and the Union officially ceased in 1926.
But, Einaudi notes, one positive did come out of the venture: It helped slowly modernize and stabilize the European monetary system, while setting the stage — and perhaps serving as an example of what not to do — for the European Union that reigns today.
This article first appeared in the German newspaper Die Welt. Meghan Walsh contributed reporting.
- Ulli Kulke, OZY AuthorContact Ulli Kulke