Adventures (Tragedy) of Greek Drachma: From 1830s to joining Euro

Not sure why we don’t really have many papers on history of Greece economy circulating around. We are told repeatedly that Greece has a terrible economic and political history full of crises. But the empirical or historical work is rare to find.

I discovered this gem of a paper by Sophia Lazaretou of Bank of Greece. It gives history of Greek Drachma and monetary developments from the 1830s to joining Euro. She calls it adventures of Greek Drachma though on reading it you realise it is more of tragedy. And with the current experiences , even tragedy is a light term.

This paper enumerates the adventures of the drachma step by step. Its main purpose is to provide some historical perspective about the behaviour of the monetary and fiscal policies pursued in Greece during the period from the early 1830s until the introduction of the euro. For Greece and for the drachma, the lessons from the past are very important. Since the formation of the modern Greek State, government officials have striven – sometimes making hard efforts – to keep abreast of international monetary developments. This was because they understood that the participation of a peripheral, poor and inflation-prone country with a weak  currency and an underdeveloped money market, like Greece of the time, in a monetary club of powerful economies, such as the Latin Monetary Union (LMU) of the 19th century, could dramatically improve her international credit standing and imply important benefits in terms of exchange rate and monetary stability, and long-term foreign borrowing.

The evolution of the Greek monetary system was affected both by international monetary developments and by domestic fiscal disturbances often caused by the frequent military conflicts that constitute a major characteristic in the history of modern Greece. In periods of smooth and efficient functioning of the economy, the monetary system did not face any problems. But whenever substantial economic disturbances occurred, mainly of a fiscal nature, the monetary system suffered adverse consequences, resulting in monetary destabilisation, which, in turn, caused economic instability.

The paper was written in 2003 and so much of the current adventures are not there.

Still, the paper doesn’t really miss much of the current crisis as it is all repeating of the past. Greeks have had such an amazing time with respect to their currency and monetary economy, that history just keeps repeating.

In all the seven episodes the author looks at, you see the same story:

  • irresponsible fiscal policy,
  • large fiscal deficits,
  • high inflation,
  • sharp depreciation of the currency,
  • defaults on both domestic and external debt
  • Foreigners stop lending to Greece
  • Recession follows
  • Some changes happen in the monetary system – more depreciation/new monetary system/peg etc
  • Economic Activity resumes
  • Govt starts to borrow again…

I mean in so many places one actually has to see whether he has moved any forward. As you read near same things previously as well.

Instead of looking at solutions to fix its fiscal policy, Greece has always looked for some short-term solutions. The solution mostly has been joining some emerging monetary standard. Each time Greece got into trouble, it got out because of own  currency.  There was sharp depreciation as internal devaluation not possible. And it moved on.

In Euro crisis, much of the history is pretty much the same. Just that it does not have its own currency this time. There is nothing to devalue. Asking Greeks to devalue is like trying to straighten a dog’s tail.  So it is pulling the rest of the members to bottom as well.

On Greece joining the euro, the author says:

Having achieved the nominal convergence of the Greek economy with that of the European countries, Greece needs to take advantage of the opportunities provided by monetary union. Real convergence needs to progress by improving  competitiveness in product markets, flexibility in labour markets, and reducing the fiscal deficit and the debt-to-GDP ratio. Market deregulation, privatisations, more efficient utilisation of EU resources for a substantial upgrading of social and economic infrastructures, access to the information society and improvement of public administration productivity, should be regarded as priorities of economic policy, to be pursued in the era of EMU participation in order to achieve real convergence.

Knowing Greece’s history and having written about it, author was being too optimistic.

Infact Europeans should not be surprised at all with the current crisis. It is all written in history. The real surprise  would have been if Greece would have disciplined itself and went on the path suggested by the author.

I have always wondered this. European policymakers take a lot of pride in their history. You tell them anything and they say you do not know our history. Now, they would have clearly known about Greece’s history. Why was it allowed in the Union at the first place? What were they expecting.To hear people like Sarkozy say it was a mistake to admit Greece in the union is like not knowing your own history. And history is something you take great pride in….

This paper is a must read. Should be placed in the reading list on European crisis…It has a very useful reference list on mon unions and previous Greece crisis as well..


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