ByBiagio BossoneandAbdourahmane Sarr

Adjustment is not necessarily only a fiscal issue in a currency union for an individual member country: the solution can be monetary as well. Indeed, Greece and other European countries find themselves dealing with a classical problem of unsustainable fiscal deficits, low growth, high public debt, and lack of competitiveness. Fiscal adjustment and structural reforms are one way to resolve that problem – which explains the austerity plans proposed for Greece to date. Another is currency devaluation, which can achieve both fiscal and external adjustment. The problem, however, is that we do not know how to implement an exchange rate devaluation within a monetary union without asking the countries that need devaluation to exit the union. In fact, it can be done.

We propose to establish a devalued exchange rate between bank accounts and the common euro monetary base of individual European countries experiencing fiscal and external adjustment problems. The devalued bank deposits would in all respects constitute a new complementary currency to the euro. A surprise devaluation of those accounts vis-à-vis the euro, while allowing the adjusting country to remain within the euro area, will have the benefit of increasing the domestic price level expressed in the new currency, raise nominal fiscal revenues in that currency, and reduce the fiscal deficits without expenditure contraction as expenditure would not be allowed to increase proportionally to the devaluation for new expenditure contracts. Since most payments are effected in deposits, the reduction in domestic absorption caused by the devaluation would lead the relative price in euros of domestically produced goods to decline. This and the more expensive conversion of the new deposits into euros would boost the local economy, much as in a case of conventional currency devaluation. Holding euro deposit accounts would not be precluded, and depositors would be free to move money in and out, and across, the two types of accounts.

The proposed solution derives from revisiting the means of exchange function of money in dual banking systems. In such systems, there are typically two types of means of exchange: base (or central bank) money and the money that banks create by multiplying base money, or bank deposits. Bank deposits – or commercial money – are complementary to base money. Until payment settlement takes place at the central bank in base money, commercial money is just a medium of exchange by convention. It is also only by convention (or due to an implicit decision) that there is no exchange rate between base money and commercial money – or better, that bank deposits and base money exchange at par, with the central bank standing ready to provide the latter to solvent banks against eligible collateral. In fact, there is no compelling reason why this should remain so. Changing these conventions could help Greece and other European countries in need of adjustment in several ways.

The appreciation of the euro base money relative to the new deposits would result in an inflow of euros to purchase domestic goods and assets that would now be more competitive internationally. The euro inflows would reduce the need for external euro liquidity support and debt restructuring, as they could be used to refinance public debt. Since the government can raise new taxes and make expenditures for new contractual agreements in the new currency, it could also borrow in that currency and convert it in euros to refinance its debt. As the adjustment proceeds, deposit domestic output would increase thereby increasing nominal fiscal revenues, and reducing the fiscal deficits*.* The proposed solution would not amount to a competitive devaluation, since it could be coordinated with the ECB and jointly agreed upon by all euro area members. Very importantly, the ECB would continue to set euro base money exogenously (the settlement currency), thereby controlling the inflation of prices expressed in both currencies.

The idea of introducing a complementary currency to solve economic problems is not a recent one. In the early 1930s, the small town of Wörgl in the Austrian Tyrol, heavily hit like every other town in Europe and America from the Great Depression, decided to issue its own currency. Wörgl’s mayor Michael Unterguggenberger issued numbered “labor certificates” in various denominations, which became money after being stamped at the town hall, and depreciated monthly by 1 percent of their nominal value vis-à-vis the national currency. The depreciation (or demurrage) fostered rapid circulation, boosting the local economy, and encouraged payment of taxes, past, current and upcoming. The taxes were used to provide social services. Physical assets were created. The mayor put this money in circulation by paying 50 per cent (later raised to 75 per cent) of the wages of the town’s workers in the new money. All businesses in Wörgl accepted the currency in payment at face value, and the notes returned to the local treasury as dues and taxes. The huge unemployment was reabsorbed. During the period the Worgl money was in circulation, the mayor carried out all the intended works projects, and unemployment. Six neighboring villages copied the system successfully, and the French Prime Minister, Edouard Dalladier, made a special visit to see the ‘miracle of Wörgl’. In January 1933, the project was replicated in the neighboring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea.[1]

There are other more recent examples of complementary currencies and demurrage currently being experimented (Kennedy and Lietaer, 2004) and suggested by prominent economists. Willem Buiter (2009), who proposes that central banks boost lending via negative interest rates recommended to introduce the “rallod” as “inside money” complementary to the dollar and eliminate paper currency to operationalize his proposal. [2]To achieve negative interest rates, he proposes to establish exchange rates different from 1 between the dollar and bank accounts. That way, a trend devaluation of bank accounts combined with a lower bound of zero on interest rates would result in a negative yield (equivalent to demurrage), and increase money velocity.[3] This would increase money velocity, avoid deflation, and spur growth.

Following Bossone and Sarr (2002, 2005), and, in lieu of resorting to demurrage or negative interest rates à la Buiter,  an additional possibility could be to allow commercial banks to distribute the new deposits to clients, at their discretion and without need for reimbursement.(and with no implicit or explicit exchange rate guarantee).[4]. This provision would overcome the problem that, even with negative interest rates, firms and households might still not want to borrow for fear of not being able to repay the loans. It would also provide depositors with an income supplement just like cash-transfers, and thus support spending during the adjustment.  Commercial banks could create as much liquidity as the economy needs, as long as they remain liquid in euros, and would be induced to finance activities in the economy that would increase its euro earning capabilities (export and import substituting sectors). Commercial banks would obtain euros by selling the new currency used for payments by clients, and would invest reserves in euro-denominated assets. The proceeds from invested euro reserves would partly pay for their operating cost – much like central banks do today.

In such a system, there would be no liquidity trap, because allocations of new deposits would go to those who are willing to use them for expenditure needs. Nor would there be debt overhang problems, since deposit distribution would not raise debt. Besides, the devaluation of the deposits vis-à-vis the euro would help in the external adjustment process and restore competitiveness for all appropriate economic units be they countries, regions within a country or a monetary union.

There are more currencies complementary to a national currency than one might think of, with varying exchange rates between the two. The British Pound is complemented by “pounds” issued in Jersey, Scotland and Ireland. The CFAF of West and Central African States is linked to the euro through the French treasury making it complementary to the euro. It is high time, in Europe and elsewhere, to think innovatively and try to fix monetary unions that were born in less than optimal monetary areas and yet were not given the instruments to cope with their suboptimality.


Bossone, B. and Sarr, A (2002): “A New Financial System for Poverty Reduction and Growth,” IMF Working Paper WP/02/178 (Washington: International Monetary Fund).

Bossone, B. and Sarr, A (2005): “Noncredit Money to fight poverty,” in The Monetary Theory of Production: Traditions and Perspectives, Giuseppe Fontana and Riccardo Realfonzo, eds.

Buiter, W., Negative Interest Rates – When are they Coming to a Central Bank Near You? In: Financial Times, Willem Buiter’s Maverecon Blog, May 7, 2009.   

Jacobs, J. (1984): Cities and the Wealth of Nations. Principles of Economic Life.New York: Random House

Kennedy, M. and B. A. Lietaer (2004): Regionalwährungen: Neue Wege zu nachhaltigem Wohlstand (Regional currencies: New paths to sustainable prosperity), Riemann