Could greek euro notes become forcibly converted to drachmas?

Question

The british MP John Redwood recently claimed in the Daily Mail that

It’s unlikely, but what you could have is a situation whereby Greece had to leave the eurozone and their euros were compulsorily converted to drachmas.

‘If they decided even Greek-issued euros held overseas had the same value, it could mean that the euros carried home by UK holidaymakers were suddenly worth a lot less than when they acquired them.’

I'm having serious trouble that this would even be legally possible, my understanding was that all Euro notes are equivalent, no matter which country issued them.

Would it be even possible under the current EU laws and regulation to forcibly convert Euro notes isssued by Greece to drachmas? Are any plans to do something like that known?

Answer 1

Euros are not property of national central banks, they belong to the European Central Bank, but they are issued by individual banks (and printed in several places, not necessarily in the same country where they are issued).

Each euro note has a serial number. Its first character is a letter identifying the issuing state (Greek euro notes have "Y"). See http://en.wikipedia.org/wiki/Euro_banknotes#Serial_number.

Therefore, it is technically feasible to recognise the "Greek" euros (Greek coins are even easier to single out because one of the faces is always nation-specific). Those euros do not only circulate in Greece, therefore anybody physically owning euros, and not just foreign tourists coming back from a holiday in Greece, would be affected.

Nevertheless, this is not the way it works when a country opts out from a currency union: in those cases a new currency is created (or revived, like the drachma) and an initial official exchange rate is established by the government. Bank deposits denominated in euros in Greek banks may or may not be forcibly converted according to this exchange rate. See http://en.wikipedia.org/wiki/Argentine_economic_crisis_%281999%E2%80%932002%29#End_of_convertibility for a recent example of a similar process.

Assigning a special value to the Greek notes would be a breach of the European treaties and the other countries would have no reason to accept nor implement such a decision. Those treaties do not comprise any mechanism to get out of the Eurozone, so the conditions would have to be negotiated or imposed unilaterally. Exit strategies implying distinct values for euro notes issued by distinct Eurozone countries are extremely unlikely because they would raise countless legal, diplomatic and practical problems; creating a new drachma and replacing euros with it is much more straightforward.

Bottom line: this British MP does not seem to have a very clear understanding of how the Euro works (which, BTW, is pretty typical of most British politicians).

Answer 2

Greece could not print new drachma discretely, so they may use at first a different technique, like putting a stamp on banknotes, identifying them as "Greek" and no longer valid in the rest of the Eurozone.

A stamp was used to differentiate banknotes when the Austro-Hungarian krone broke into individual currencies. Although at that time, government were worried about money flooding in the country, whereas Greece is worried that money will run to Germany/France.

Converting banknotes issued by Greece as "Greek" would be a weird solution, and likely to get a lot of Europeans mad.

'As for people such as shopkeepers rejecting Greek euro notes elsewhere in Europe, there seems little point in doing this for as long as the banks across the eurozone are obliged to take them.

'I suspect that the rules would be made up as we went along.'

• Andrew Smith, chief economist at accountant KPMG (link)