By Professor Richard Roberts, Kings College London
The great Grexit cliffhanger runs and runs. There might be a deal now, but hardly one that provides long term certainty that Greece will stay in the euro. Leaving, however, might be more difficult.
Among previous European multinational currency unions — the Latin Monetary Union and the Scandinavian Monetary Union, which operated for four decades before the First World War — countries checked in (and occasionally suspended full participation) but they didn’t check out. With a notable exception.
The LMU and SMU featured fixed exchange rates between members’ national currencies and common money in the form of coinages of aligned weights and bullion content that were interchangeable like euro notes.
Large denomination coins were gold, while everyday change was silver. Since the official value of the silver coins was around 8 per cent above the cost of the silver content, minting generated handsome seigniorage revenues. The rules stipulated limits on minting to allow all member governments to benefit and to restrain inflation.
The LMU was formed in 1867 by France, Belgium, Switzerland and Italy. France, under Emperor Napoleon III, was keen to expand membership to extend its economic and political reach and Romania and the Papal States soon joined the club.
The latter, which was in dire financial straits, lied during negotiations about the quality of its recently debased silver coins, a deception with some similarity to Greece’s fabrications about its public finances ahead of joining the euro.
Membership of LMU opened the door to boosting seigniorage revenue by a further form of cheating — breaching the minting limit. Based on its population the Papal States were allowed to issue 3m francs of silver coin; other members were outraged to learn that it had minted 26m, nine times its quota.
It was expelled from the LMU — a Pontifexit — and was soon annexed by Italy.
Wary of such deception, the next LMU applicant — none other than Greece – was allowed to join only on condition that France had control of Greek coinage that would be minted in Paris (postponed because of an uprising on Crete).
The path from a common currency to new successor currencies is illustrated by the breakdowns of a number of national currency unions.
Defeat in the First World War resulted in the demise of the Austro-Hungarian Empire, with five successor states — Austria, Hungary, Czechoslovakia, Romania and Yugoslavia. This meant the demise of the Austro-Hungarian currency union, which had structural similarities to the euro — a common currency, the crown, and a single central bank; but separate sovereign states, parliaments, governments, budgets and national debts.
Cash is king
Cash was a key means of payment with K38bn worth of Austro-Hungarian krone banknotes in circulation. Currency separation and the creation of successor currencies proceeded in two stages.
First was the stamping of crown banknotes with national stamps. During 1919 and 1920, at different times and with no co-ordination, the successor states stamped the crown banknotes that circulated in their territories with a national symbol, at which point unstamped notes ceased to be legal tender.
Countries imposed varying levies and charges on stamped notes, leading to widespread forgery of national stamps and cross-border flows of unstamped crown notes. While stamping was in progress, capital controls were reinforced by closed borders. Then, the stamped notes were exchanged into the new national currencies when they became available.
The break-up of Czechoslovakia is another example of a currency union splitting.
Initially, the plan was to retain the Czechoslovakian monetary union and a single currency after the political divorce on January 1, 1993.
But the public was sceptical and there was a destabilising torrent of funds from Slovakia to the Czech Republic and a quick depletion of foreign reserves. On February 2, it was announced that the currency union would end six days later.
In the meantime, cross-border money transfer was halted by capital controls and border closure. Deposits were denominated in the new Czech and Slovak currencies while paper national stamps were glued to 150m Czechoslovakian banknotes that were exchanged for unstamped notes (later replaced by new national banknotes).
The exercise, involving 40,000 people on the Czech side alone, went smoothly. As the public had anticipated, the Slovak currency soon went to a discount against its Czech counterpart.
Both countries saw downturns in 1993, but recovered swiftly. History suggests that a transition from the euro to a new drachma might be conducted quickly and smoothly — but that would be the easy bit.
