Euro or Drachma—or Both?

The original paper examined whether a euro-area member facing a severe competitiveness and financing crisis could introduce a temporary national currency alongside the euro. The proposal sought a middle route between prolonged internal adjustment and a complete departure from the monetary union.

Why the proposal emerged

In 2013, public debate about Greece and other peripheral euro-area economies centred on weak output, high unemployment, public debt, banking pressure and wide differences in borrowing costs. Cyprus's banking crisis had also renewed concern about disorderly policy decisions and capital movement.

The paper argued that expenditure cuts and wage adjustment alone could deepen contraction before competitiveness improved. In that view, falling activity reduced tax receipts, made debt service harder and limited the fiscal room available for productive investment.

The authors therefore considered currency depreciation as a possible route to lower the relative price of domestic production, support exports and encourage substitution away from imports. They also recognised that an outright euro exit could impose large balance-sheet costs and disrupt trade, contracts and financial stability.

The temporary parallel-currency design

The suggested structure would keep the euro in circulation while introducing a national unit—described for Greece as a “new drachma”—for selected value created after a formal cut-off date. One new unit would initially correspond to one euro before being managed toward a stated depreciation target.

Core features

1. Existing value remains in euros. Deposits and claims established before the cut-off would generally retain euro denomination.
2. Future activity may use the parallel unit. Wages, prices and eligible obligations arising after the cut-off could be denominated in the new currency.
3. Long-term contracts receive special treatment. Banks, lessors and other parties with euro liabilities but parallel-currency income might receive central-bank compensation instruments.
4. The depreciation follows a published framework. The local central bank would target an exchange path rather than immediately leaving the rate entirely to the market.
5. Reintegration is planned. Participating institutions would agree criteria for eventually returning to the euro as the sole currency.

The distinction between old and new value was intended to reduce the incentive for deposit flight. Yet the paper acknowledged that confidence could still weaken if investors doubted the government's finances, the compensation mechanism or the credibility of the return path.

Contracts and bank balance sheets

A central difficulty was the mismatch between income received in a depreciating local currency and debts still payable in euros. The proposal treated this as especially important for banks, whose long-term loans could be converted while deposits and wholesale funding remained in euros.

Its suggested response was for the national central bank to issue compensation bonds. These instruments would aim to preserve regulatory capital and could, under specified conditions, support refinancing. Similar case-by-case rules were contemplated for long leases and rental agreements.

The paper recognised that not every contract could follow one rule. Forward transactions, externally financed obligations and agreements involving future performance would require legal classification and transparent criteria. This complexity remains one of the concept's most significant practical constraints.

Managing money and the exchange rate

The national central bank would use refinancing rates, open-market operations and temporary capital controls to manage the supply of the parallel unit. The proposal also envisaged a market for forward contracts that would allow holders to hedge future conversion into euros.

Under that design, a clearing institution would administer contracts while the central bank varied premiums and monetary conditions to influence inflation expectations. The wider arrangement would require coordination with European institutions and agreement on duration, policy limits and reintegration criteria.

Expected economic channels

The authors expected depreciation to improve price competitiveness for exporters and domestic producers competing with imports. Imported goods would become relatively more expensive, while additional demand for domestic output could support employment and tax receipts.

• A stronger trade balance through higher exports and lower imports;
• greater domestic production and employment;
• improved public revenue as activity recovered;
• more room to pursue structural reforms and productive investment.

These were model-based expectations rather than observed outcomes. Depreciation could also raise import prices, reduce real purchasing power and create distributional effects that the original framework did not fully quantify.

The historical Greece simulations

The paper applied a two-year econometric model using data available at the time. It considered illustrative depreciation scenarios of 15%, 30% and 50%. The authors associated larger depreciations with stronger export growth, fewer imports and lower unemployment, but these estimates were conditional on their model and should not be interpreted as current forecasts.

The original numerical results depended on baseline data from the crisis period, behavioural assumptions and a short horizon. Subsequent economic events do not validate those estimates automatically. They are best read as an illustration of the proposal's intended transmission mechanism.

Benefits claimed and unresolved risks

The proposed advantage was speed: prices and incomes could adjust more broadly than under gradual wage reduction, while euro membership and pre-existing asset values would nominally remain intact. A defined schedule might also be less disruptive than an improvised currency exit.

However, the plan required unusually strong institutional coordination. Contract conversion, central-bank compensation, capital controls, inflation management, euro reserves and legal authority would all need to be settled. Credibility would be essential because anticipation of conversion could itself trigger withdrawals or asset sales.

The distribution of gains and losses would also matter. Exporters and producers of domestic substitutes might benefit, whereas import-dependent households and firms could face higher costs. Any assessment would therefore need to consider household purchasing power, bank solvency and the legal rights of creditors alongside headline growth.

How to read the proposal today

This archive piece is useful as a record of policy thinking during the euro-area sovereign-debt crisis. It demonstrates an attempt to combine exchange-rate flexibility with monetary-union continuity, but it does not establish that the arrangement would have been legally feasible or economically successful.

Readers should distinguish its design claims from evidence, compare the proposal with research on optimum currency areas and currency substitution, and examine how later institutional reforms changed the euro area's policy framework.