THE Free exchange article in this week’s print edition—On the origin of specie—expands on some previous thoughts about the future of the euro. History shows that currencies have tended to evolve informally because they are the best thing to use for trade, or be formally underpinned by a fiscal power. The euro has a flaw in that it is neither of these.

The existence of informal currencies suggests that it might be possible for some euro-area countries to use both the euro and some other currency at the same time. The idea would be to adopt the parallel currency to promote a slow switch away from the euro, thus avoiding the costs a country would face if it tried to switch suddenly. There are lots of examples of informal and parallel currencies. At a micro level there are local currencies, including Ithaca Hours, used in New York and the Brixton Pound used in London. On a macroeconomic level there are countries like Zimbabwe and Ecuador where American dollars circulate instead of a domestic currency.

Sadly, neither of these currency options help Greece. The idea with local currencies is to boost trade between small local firms by setting up a new medium of exchange that national competitors don’t use. The problem with local currencies is that shopkeepers can’t use them to pay debts to the bank, or taxes to the government. The Greek state would face a similar problem if it issued a new domestic currency: to pay back its euro denominated debt Athens must keep collecting taxes in euros. This sustains domestic demand for the euro meaning that a voluntary switch to the new currency would be unlikely. 

Dollarisation would not work either. Switching to the dollar is a step taken when a country has lost monetary control and is suffering runaway inflation. By dollarising the temptation to print money is removed, as decisions about the dollar money supply are made by the Federal Reserve. The result is that the country still lacks monetary control, but gains a currency associated with low inflation. But Greece needs a weaker currency, not a harder one. Using the dollar would not bring the inflation Greece needs to erode its debt or the depreciation it needs to improve its trade balance.

The problem is that—as Charles Goodhart set out in 1998—the euro is a unique monetary experiment. It has put Greece in a uniquely difficult position. Its currency options look pretty limited.