German euros and Greek euros. Are they really the same?

Just like the US dollar, the euro is a single currency which is shared by 19 countries of the European Union.

That’s the official fiction. If the powers-that-be in the EU had really wanted it that way they could have had it that way. They would have needed only one central bank. There would have been one design for each of the various banknotes and one design for each type of coin.

Instead there are multiple country based designs for both notes and coins.  Notes carry a serial number including a country code. There is one national central bank (NCB) per country plus we have the European Central Bank (ECB) .  Whereas most currencies can be considered to be a two layer structure, the euro has a three layer structure. It can be best understood as a collection of tightly pegged but slightly different euros. The Bank of Greece (their central bank) can still print and create euros which they normally do with the approval of the ECB. That approval has been recently withdrawn. So what happens if they create euros without the ECB’s approval? The ECB can only refuse to guarantee them on a par with other euros so instantly the Greek euro would float.

All Greek banks whether domestically owned, or foreign owned, rely on the BoG for their liquidity. So the closure of the Greek banks, including all foreign owned ones, has nothing to do with their financial viability, but everything to do with the inability of the BoG to provide the euros they need to function.

If the euro were a truly single currency the ECB would not be able to isolate Greek banks and their account holders in the way they have. The banks could open tomorrow if the BoG started to create euros again. And indeed they should, preferably with the support of the ECB. The ECB has a duty to all Greek euro holders just as the US Fed has an obligation to all holders of US$. It would be inconceivable that any political dispute between the Federal government and , say , the city of Chicago would result in the residents of that city being denied full access to their bank accounts.

If the BoG issued euros without ECB approval then we’d have a new currency. The Greek euro. Just what would be the status of all previously issued euros, both digitally and physically created would depend on the willingness of the ECB to guarantee them. It would be legally messy but it is a quick solution to get that new currency.

In the EZ, bank depositors, except of course in Greece at the time of writing,  can costlessly shift euro deposits from one bank to another anywhere in the zone. Any depositor of an Irish bank, say,  can move their money to a German bank. This requires the Central Bank of Ireland  to obtain reserves that get credited to the Bundesbank, the central bank of Germany. If deposits tend to flow from the poorer nations,  to Germany in particular, their central banks go ever more deeply into debt to the ECB to obtain reserves that accumulate in the account of the Bundesbank.

As recent events in Greece show, it makes no sense at all for anyone to hold any amount of money in the peripheral banks. The sensible thing is to shift it to a German bank for safe keeping. This is not doing the Germans any favours. It is simply the best way of forcing those most in favour of the euro to accept full liability for euros held by all Europeans. So logically nearly all  euros should end up being German euros anyway!

Is this yet another fundamental flaw in the architecture of the eurozone? The ECB has to guarantee the liabilities of the peripheral NCBs to hold the system together but what if  any country defaults? They will be rid of their National debt at a stroke and can then start afresh with a new currency. The ECB ends up with the bill, which means the rest of the eurozone. Ultimately if everyone else defaults it is Germany, or the last country left in the system, which has to pick up the tab for everyone else.

The Germans should be extremely worried at the prospect of Greece defaulting to be followed by whoever may be next, then whoever is next after that. At the first sign of any repetition of the Greek experience,  savers in the less safe regions of the EZ will, if they are sensible, shift the bulk of their savings out of their local bank and into German euros. They should make plans for doing that now, while there is still  time.

14 responses to “German euros and Greek euros. Are they really the same?

  1. Right. And it also shows the “independent”, ” apolitical ” central bank myth up too!

  2. Good article. But I didn’t follow that bit about transferring reserves to the Bundesbank. Why does that have to happen?

    • Reserves have always to follow deposits. Reserves are in a way the “real money” any bank holds. Or the money issued by the central bank. ie The liabilities of the central bank. So if I hold a £100 in crisp BoE issued notes I have central bank money. I deposit that in a bank and the bank issues me with a statement showing £100. But these are the liabilities of that bank. They put the £100 in their reserve account.

      If I shift those bank liabilities to another bank, they’ll want to swap them for central bank issued money. They won’t want to hold the liabilities of another commercial bank.

  3. ‘Whereas most currencies can be considered to be a two layer structure, the euro has a three layer structure.’

    I agree with the general point, but, out of curiosity, what would happen if the (say) St. Louis Fed started operating without the approval of the Board of Governors?

    • First you’d have to consider the possibility that the Board of Governors had ordered the St Louis Fed to withdraw support from all banks in their region. Effectively almost shutting them down in the same way as has happened in Greece.

  4. Right, this is just a hypothetical exercise to satisfy my curiosity (I don’t know that much about the Fed). Imagine that the Board of Governors had a moment of madness and did just what you describe – just like the ECB with Greece. Could the St. Louis Fed (speaking purely operationally here) unpeg its currency from the rest of the Federal Reserve system?

    • I must say I have never considered that possibility! It would be possible for any region or State to unpeg its currency. It’s happened before with the Confederacy. There would have to that degree of political split fOR it to re-occur. The US is single country, so the laws of the Federal government would prevail and prevent any State asserting its control over any of the 12 Fed Reserve banks.

      Then there’s the problem that the banknotes , or bills, aren’t different as in the EZ. At least I don’t think so. I’d have to check if there are any subtle differences.

      So it is theoretically possible but much more difficult of course. In the UK with the desire of many Scots to become independent the mechanism of a split in the currency has been discussed there. How would the National debt be split up etc? There was a similar split in Ireland. For years they tried to get by using the UK £ but they managed to run their own independent currency eventually. Pity they scrapped it and adopted the euro instead.

  5. Peter as to the so called “national debt” being split up:
    Scotland owns shares in the BoE too!
    Gilts are not a claim on future taxes. Gilts, Reserves and Cash are just different types of money with ‘welfare’ payments attached. From an MMT point of view it is a non issue.

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  7. Peter, can you do a post on interest payments. Something along the lines of if spend, generate tax and reduce bond issuance and spent again, etc if not “borrowed” again.
    I am interested in how the ECB controls yields as well but don’t really get the SMP and other euro land craziness.

  8. Pingback: German euros and Greek euros. Are they really the same? – Written by PETER MARTIN ( MODERN MONETARY THEORY) | winstonclose

  9. Pingback: COLPO DI SCENA? -


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