“All of the country’s contracts, including its debt contracts with foreigners, should be converted into drachma. This would make the Greek government and the Greek banks solvent once again. “At the same time, the Community of States should also refrain from trying to collect up all of those euro banknotes currently in the hands of Greek citizens, but should allow them to be used for cash transactions instead, although prices would be stated in drachma,” added Sinn.
“According to an official assessment by the EFSF bail-out fund, the Greek government is insolvent, and since it is insolvent, so are the banks closely connected to it”, explains Sinn. In this situation the ECB should no longer allow the Greek central bank to grant commercial banks further emergency loans. “This will naturally bring the economy to a standstill unless a new fiscal bail- out package is offered or Greece returns to the drachma. Since it is foreseeable that negotiations over another bail-out package will only waste more time, without a successful outcome, Greece should introduce a new currency,” argues Sinn.
Since the new drachma would depreciate rapidly, Greece would presumably experience a strong economic upturn within one or two years, because Greeks would buy fewer imports and tourism would see an upturn. In addition, flight capital would flood back into the country very quickly. In Sinn’s opinion, “The Community of States should soften the difficult transition process with generous financial assistance, which should be earmarked for humanitarian aid for the poorest. Moreover, Greece should be given the opportunity to return to the euro at a later date and at a different exchange rate.”
According to Sinn, “The Greeks on the whole have pots of money, around 120 billion euros more than would normally be expected of a country of its size. But this surplus cash has largely been taken out of the country and is extremely unequally distributed. Greece’s socialist government can surely now be expected to make an effort to raise part of the money required to avoid a humanitarian disaster itself.”
