The latest news from Europe indicates that Germany continues to resist a compromise solution to the Greek crisis that is contained in the latest proposal by the Greek government for a post bailout 6 month arrangement which would permit Greece a reasonable breathing space to negotiate a different sort of arrangement to manage its debt,end dysfunctional  damaging austerity and restore its economy on the road to recovery.Given this intransigence  if there is no movement Greece should proceed to establish a second currency called the ‘new drachma or whatever name Greeks prefer and have the government directly spend it into circulation in a portion of public sector wages, pension payments, infrastructure programs and support for low income persons. The currency will initially trade at some market determined discount to the euro but over a short period of time will adjust and find a stable exchange rate to the euro which will continue to be used to pay off external debts. All existing bank deposits in euros will continue to be honoured  in euros and the two currencies can run in tandem for quite some time. In this way Greece will get the breathing space that is necessary to allow them the time necessary to restructure their debt and guarantee the stability of the banking system. As the new currency finds its level of value adjustments can be made to the amounts paid in pensions and salaries to ensure that people receive payments close in value to the euro equivalent. In the run up to the euro there were de facto dual currencies in use in many European countries. There is no reason not to use this  monetary and fiscal policy tool in Greece today.

Rather than worry about Gresham’s law and the bad money driving out the good as some critics of dual currency suggest,(See for example Mario Nuti’s comments on dual currencies on blogspot and his most recent post on the Greek situation on Feb 12 )  used judiciously in combination with a balanced budget on operating account and a very large stimulus on capital account directed at infrastructure public works employment substantially financed by the new currency Greece can begin to emerge from the terrible destructive austerity imposed on it by the EU, the IMF and the ECB.