The prognosis for rapid resolution of the European financial crisis fluctuates widely from one week to the next, but the prospects for a positive outcome continuously decline. Despite the prolonged intensity of the crisis, the likelihood of a dramatic change in European public policy looks doubtful. Whether Greece withdraws from the Euro or banks, governments and the IMF ante up sufficient resources for a rescue, few believe the crisis can be fully resolved within the present legal and political framework or that it will end with Greece. Either a Greek bankruptcy or its exit from the Euro zone would be an event of incalculable consequences that could well prove catastrophic to the Euro and damaging to the EU itself, as George Soros has repeatedly warned. Will Europe learn the hard way the lesson the US government learned after deciding that the failure of Lehman Brothers was the least-cost solution to the Subprime Crisis in 2008? When the full consequences of Lehman’s failure became evident, the US was forced to reverse policy and extend emergency lifelines to the entire US financial services industry and even to many European banks.

The problem with both the options placed before Greece is that they fall far short of a comprehensive solution, for they focus on financial relief and neglect the underlying economy. The pressure on Greece to reduce its fiscal deficit will place unrelenting pressure on the real economy by forcing layoffs of government workers, payroll cuts, suspension of public works and, perhaps, even reduction in public services. Declining national income will result in falling tax revenues from a smaller tax base, generating further pressure on the deficit and compelling further budget cuts, a vicious cycle that could spiral downward until volatile public sentiment became so violent that it compelled a radical change of course.

Research by Fellows of the World Academy of Art & Science over the past decade points to another option that could address both the financial and the economic crisis in Greece without necessitating either bankruptcy or withdrawal from the Eurozone. It would involve introduction of a parallel Greek currency (drachma) by the Government of Greece stipulated as legal tender for certain types of transactions. The euro could be maintained as the only valid currency for payment of foreign debts and for exports and imports. The drachma could be specified as legal tender for payment of domestic salaries, local transactions, utilities and other public services, and some forms of taxes. The drachmas should be freely convertible to euros at a floating exchange rate, thereby ensuring their acceptance while at the same time allowing for depreciation against the euro.

This proposal combines two strategies that have proven highly successful elsewhere. The introduction of a parallel freely convertible currency was successfully employed by Yugoslavia in the mid-1990s to counter hyperinflation, ensure essential welfare payments, and stimulate economic growth. Beneficial results were achieved on all three counts within a matter of weeks. The acceptance of the drachma for some forms of services and taxes would ensure immediate demand for the new currency, facilitating the transition. Government might combine a mixture of euro and drachma currencies in equal or unequal proportions in its welfare and salary payments, thereby immediately reducing its euro expenditures and eliminating its euro deficit.

But the greatest potential benefits of the parallel currency would be its stimulating effect on the real economy. Greece suffers from a liquidity crisis. Its efforts to service its foreign debt only aggravate that crisis, drying up the essential resources needed by the local economy. As the crisis deepens, the employment of workers, production capacity and other resources will decline since there is insufficient money to fund local transactions. The introduction of the drachma can be used to increase liquidity as a stimulus to the local economy.

The stimulative impact of a parallel currency has been documented around the world by thousands of experiments with complementary currencies, some operated by local governments such as the highly successful experiment in Wörgl, Austria during the Great Depression and others implemented by non-government or commercial organizations.

Production of goods in depreciated drachmas would allow Greece to adjust its export prices to be more competitive with goods from other countries in the Eurozone and would raise the price of goods imported for euros against domestic production. Further, the government could loan or spend drachmas to enhance public services, stimulate public works, spur entrepreneurship, run job programs to generate full employment and, thereby, reverse the downward economic spiral.