The tenacity with which certain economic fallacies persist is truly remarkable. Take the notion that the euro currency is too strong for certain countries, notably Greece, Spain, Portugal and Italy, causing their exports to be too expensive for foreign buyers; and being members of the eurozone they are prevented from devaluing their currency to (i) improve their trading terms or (ii) to get out of trouble with debt repayment of foreign loans.


This complaint is still heard today, but most vociferously when EU membership allowed the governments of these countries to borrow heavily at low interest rates followed by failure to meet loan terms. If Greece, for example, were to ditch the euro and reinstate the drachma it would be free to devalue it, making it possible to repay its borrowings using a debased currency – hardly a recipe for impressing sovereign bond rating agencies. What they don’t see is that if Greece reneges on its debt obligations, a contrived devaluation will avail them nothing: the markets will do it for them anyway.

Drachma? Euro still preferred



But reverting to the drachma wasn’t allowed to happen, the majority of Greeks favouring continued membership of the eurozone. Those who remember the years of high inflation and economic turmoil when the drachma was the national currency prefer life with the euro, in particular the fall-back facility of being bailed out every time default looms. Even though Brussels and its central bank, the ECB, impose a harsh discipline and defaults are followed by punitive limits on public spending, with years of austerity as the price, eurozone membership is, on balance, preferred.


The devaluation preference


Greek malcontents (and their economist supporters) who advocate a return to the drachma claim that a devaluation facility would allow for currency conversion at a rate of more drachmas for the pound, dollar – even euro – effectively making exports priced in drachmas cheaper for their trading partners and, so the theory goes, increased exports will stimulate the entire economy all the way back to prosperity.

myth of export stimulus



Whatever else you may think of this strategy, it is distinctly one-sided. Greek importers would have to give more drachmas for every unit of foreign currency needed to pay for the goods they import. In short, the contemplated devaluation would, in this case, merely cause a material transfer of wealth within the drachma currency zone. Nor is devaluation a mere conjuring trick. The Greeks would not be able simply to declare a different conversion rate for imports unilaterally without reference to the markets.


If more drachmas are needed to buy goods and services from overseas, the Greek central bank would have to “create” them, setting in motion the inflationary process that always accompanies money-printing: our old friend, the Cantillon Effect: once created, the new money’s primary beneficiaries will be those able to access it most easily – namely, major companies and banks that can tap into it in the form of loans with which they can in turn make investments. As the new money filters down through the wider economy it causes relative prices to rise – for everyone, including those furthest from the initial injection, and whom the new money has not yet reached, such as pensioners and poorer sections of the community.


Inflation – daylight robbery


Because the new money was never real, this process of relative price rises is effectively a transfer of wealth from the underprivileged last receivers to the wealthy first receivers. This is why inflation is referred to as a non-legislated tax: government has seized purchasing power from its citizens without legal approval.

clamouring for another bout of debasement


Even the supposed beneficiaries of the devaluation, the hallowed manufacturers and exporters, will find that the factors of production making up their supply chains now cost more in local currency terms. They will soon be clamouring for another bout of devaluation to revive their export markets.

Underlying this futile ploy of the devaluation snake eating its own tail there is an even more basic conceptual fallacy. This is the general idea that the euro, or any other currency, is somehow not suitable for countries with vastly different levels of productivity. In this context the countries usually identified are Greece and Germany.

Different levels of productivity – no problem

Think about it: if sheep-shearing crofts in North-East England, with lower productivity per capita than in, say, hi-tech hotspots like Cambridge, are able to use a common currency, sterling, to buy mobile phones, why should countries not be able to do this just as easily? If individuals with variable levels of productivity are able to trade goods and services using the same currency, again, why not countries too?

Differing productivity levels – another myth


There is nothing to prevent two countries with different levels of productivity from using the same currency. The mental obstacle to grasping this simple observation is a misunderstanding of the role of money. The currency, as an alternative to barter, is nothing more than an indirect medium of exchange and the market, the amalgam of all citizens, businesses and other economic actors trading between themselves, will determine the relative prices at which bargains may or may not be struck. Devaluation is a sticking plaster – not a solution to what is, at root, a structural problem.

Concluding observations

If the Greek government were to face up to this truth, it would take practical steps to enhance productivity – such as practising policies of non-interference; dealing ruthlessly with instances of favouritism and corruption in commerce, especially when they involve the organs of state; and repealing all the anti-competitive regulatory strictures that encumber normal processes of business.

The practical message of all this is twofold: (i) dropping the euro will not address Greece’s problems and tinkering with devaluation games will solve nothing; and (ii) the safest monetary systems are private because they must operate under the rule of law against state counterfeit. The corollary is that the worst monetary systems are operated by governments because they exempt themselves from the rule of law.


[With acknowledgments to the influential edicts of Prof. Patrick Barron]

Emile Woolf, September 2020