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Monday, 9 May 2011

Why Greece is not going to leave the Eurozone : Open letter to Der Spiegel, Todd Harrison and Mike “Mish” Shedlock of Minyanville

Last Friday May 6, there was a rumor on Der Spiegel Online that Greece wanted to leave the Euro and the Eurozone. A few hours later this rumor was debunked by the Greek government as ‘being nonsense’. That made total sense to me.

A few months ago, at the end of January 2011, the same rumor was spread about Greece and Ireland at the time. I reacted in those days with my article “Greece and Ireland out of the Euro? Don’t put your money on it!”, which I ‘retweeted’ last Friday May 6th.

Everybody that didn’t go through a currency change and especially American people might think that you can do such an operation overnight. This is as far from the truth as can be.

Today I want to write a longer article to give you an inside view. A view about what was going on in Europe in those hectical days between 1997 and 01-01-2002 when twelve countries were abolishing their national currency and welcoming the Euro.

And you can believe me: I know what I am talking about. I was a software test coordinator for Visa Card Services (VCS), The Netherlands. In those days, VCS was the sole issuer and acquirer for Visa creditcards in The Netherlands. I was a member of the interbancary testing commission where Visa and all the large Dutch banks were represented. I have spent hours and hours testing computer systems, credit cards, point-of-sale terminals and  ATM’s. Besides that I was a member of the executive team that had to make the VCS organization Euro proof.

The Euro was a project that started for Visa in about 1997. At those days I wasn’t working yet for the organization, but from 1998 I started there and soon afterwards I was added to the ‘Euro project’. This project had two very important dates:
1-1-1999    Introduction of the Euro in the non-cash payment traffic.
1-1-2002    Introduction of the cash Euro in the Euro countries.

Already the introduction of the Euro in the vast European non-cash payment network was an operation without a peer in Europe. It started with the setting of fixed exchange rates between the Euro and all twelve native currencies in the Euro countries.

And don’t be mistaken about the importance of this moment: up to today there is a heavy debate in The Netherlands about the question if our currency, the Dutch guilder (or florin), was ‘sold too cheap’ in Europe, only to be in line with the German Deutschmark. Germany was and is our main trading partner and by putting the Guilder at a more equal rate with the D-Mark, the price of Dutch goods and services might have become too high for the Germans in those days. At that time the German D-Mark was still suffering from the economic effects of the West and East German unifying process, while the Guilder was as hard as diamond. Dutch people felt that the Guilder was rated artificially low: that was good for the export to Germany, but not so good for The Netherlands itself. Some extra inflation was imported in those days, which was afterwards denied by the government, but was visible for everybody with a good set of eyes.

If Greece would readopt the Drachme now, it should do the same thing the other way around: setting an exchange rate that doesn’t make the drachme too expensive (the market will punish this as being implausible) or too cheap (a catalyst for hyperinflation in Greece). And there is nobody in Europe that can help you figuring it out.

After the exchange rates had been set, all computer systems that were used for non cash money transfers had to be made dual currency: for the native currency and the Euro. And if you know that the kernels of much banking and insurance computer systems were from the fifties and sixties (hurray for Cobol, a legacy programming language) and almost nobody dared to touch them in the nineties, you can imagine this has been a very expensive operation (billions of dollars). Greece would have to go through the same operation once again and pay the same amount of money again, with one difference: those banking and insurance systems are even older now and the amount of Cobol programmers has diminished currently.

For the introduction of the cash Euro the operation was even bigger. All ATM’s, point-of-sale terminals and cash deposit machines needed to be reconfigured for the new cash and non-cash money. ATM’s and cash deposit machines should:
  • recognize the new money;
  • distinguish counterfeits from true money without any mistakes
  • hand out the right amounts of money without grabbing double bills or forgetting to grab bills
  • settle the right amount to account numbers in two different currencies
  • have the right amount of drawers: there are four popular Euro bills, but there might be more popular Drachme bills, as this currency will have a much smaller value.
In Lelystad, The Netherlands, a money warehouse was built by De Nederlandsche Bank (DNB, Dutch national bank) that would give Scrooge McDuck five months of sleepless nights. Before 1-1-2002 there was a stash of litterally billions of Euro’s in coins and bills; afterwards it became the stash of exchanged Dutch guilders.

DNB money warehouse in Lelystad, The Netherlands
that could make Scrooge McDuck green of jealousy

In the last week of 2001 all money needed to be transported to the banks, large shops, supermarkets and department stores, without being robbed or hindered and with the rockhard guarantee that nobody distributes the money early (people and companies could receive prison time and extreme penalties for early distribution of the Euro). You could imagine that this is a ‘logistical challenge’ in the small country The Netherlands, but an absolute nightmare on Greece with its thousands of islands and shipping as a means of logistics.

And further almost all printed paper and a lot of objects mentioning the Euro need to be changed again: preprinted invoices, pricelists, traffic signs mentioning penalties, matrix signs at exchanges, menucards in restaurants, stationery, account statements. Everything you can imagine has to be changed.

And the most important factor of the Euro exchange programme was that it had to be finished at 01-01-2002, to be credible for the rest of the world. Also Greece needs a fixed deadline to keep her last bit of credibility.

Imagine one of the most complicated logistical and financial programmes the world has ever seen. And imagine that the poor Greeks need to do that one more time, without Europe helping them with anything. Can you? I can’t!

In the first place it is a very complex operation that would turn Greece upside down for at least three years. And it is a very expensive operation that might cost Greece billions of Euro’s. And it is a very, very high-risk operation involving amounts of paper money and coins that are beyond your imagination. And for what? For a currency that soon would not have the value of the paper it is printed on?! Don’t be ridiculous (no offense)!

For the rest I totally agree with Mike ‘Mish’ Shedlock and the dozens of articles he wrote about Greece:
·         Yes, Greece will default
·         Yes, Greece will restructure their debt
·         Yes, Greece will be the “bad boy” of the Eurozone
·         Yes, Greece will have many, many problems in the years to come.

But unless the Eurozone kicks the Greek out of the Euro, the Greeks will stay in there for eternity. And everything will work out fine in the end.

And was it a mistake from the beginning, to let the Greek in the Euro at the terms and conditions of those days? You bet it was! But nagging about that is about as useless as nagging about the failed opening line you used for your highschool sweetheart. It could have been better then, but what is the point for now! So let's cut to the chase and move on; that is what the Greek and the Eurozone will do too!

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