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Could Greece Adopt the Dollar?

July 11, 2015 in Economics

By Steve H. Hanke

Steve H. Hanke

What if the eurozone shows Greece the door? There are claims that the creation of a new currency regime in Greece would be fraught with problems. While the practical, technical problems would be relatively small, the political problems could be daunting.

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 …read more

Source: OP-EDS