Opinion: After Greece, everyone will want a Plan B to leave the euro

Published: July 29, 2015 3:00 a.m. ET

Market Watch

MATTHEW LYNN'S LONDON EYE

It sounds like a Jason Bourne movie. The Varoufakis Legacy, however, named after the recently departed Greek finance minister, might well be slightly more exciting that the fourth installment in the Bourne series was. Featuring hi-tech hacking, a sinister German villain, a complex financial heist, blackmail, bullying and last-minute rescues, it has every element of an action movie, minus only a high-speed car chase through the streets of Athens.

The entertainment value aside, however, Yanis Varoufakis also leaves behind him a far-more significant legacy, and one that will shape the course of the eurozone economy for at least a decade ahead.

With the revelations of the secret plans for a parallel currency drawn up by officials at the Greek Finance Ministry at the height of this year’s crisis, we now have what is in effect a reversible euro EURUSD, -0.1898%  .

That will surely not only apply to Greece. Every country will need to make contingency plans for an alternative monetary system. And that means the euro is no longer a single currency, but instead a fixed-exchange-rate regime — and that is going to be a lot less stable.

As Greece and the rest of the eurozone clashed over the country’s latest bailout package, with Greek banks closing their doors, and capital controls introduced, there was always a hole at the heart of the Prime Minister Alexis Tsipras’s negotiating strategy. He remained committed to staying in the euro.

In any negotiation, if you have already conceded the final outcome, your hand is a lot weaker. Without a credible threat to walk out of the single currency, Greece was eventually forced to cave in, and accept punishing terms from the rest of the European Union that will push its economy even deeper into recession.

Now it turns out that Greece had a Plan B all along.

Leaked transcripts have revealed that Varoufakis was working on a proposal for a parallel currency, and discussed it in depth with a group of hedge funds. The details of the plan are understandably sketchy. But they involved creating IOUs, which would in effect be a quasi-currency, and, most bizarrely of all, it involved hacking into the Greek tax system to create reserve accounts associated with each taxpayer. It was clandestine, and not perfectly thought through but then a plot to restore the drachma would have to be hatched in secret.

If it was to be launched, it would have to be done with an element of surprise, and probably overnight. It was never likely to be signaled six months in advance, with lots of preparation for the switch over. The important point was that the plan was there.

The Germans were working on something similar.

At the height of the crisis, the German Finance Minister Wolfgang Schaeuble put forward his own Plan B for Greece. It involved a “temporary” suspension of its membership in the euro, along with plenty of humanitarian aid to help it through the first few difficult months of re-establishing its own currency.

In practice, of course, the “temporary” suspension of euro membership would be a fig leaf. It is impossible to imagine the circumstances in which the Greeks would choose to rejoin a monetary system that had already plunged them into a catastrophic recession.

As it happens, both plans were perfectly sensible. The only real difference was that one involved the Greeks breaking out of the chains of euro membership, and the other involved them being released — both end up with the prisoner being free again, but the process of getting there is very different. But whether they were sensible or not is not the real point. What is important is simply that the plans exist — and once they have been made they are impossible to ever take off the table.

Surely now every finance minister in Europe is going to be continually asked whether they, like the Greeks, have put in place a contingency plan for an alternative currency. It will be a very hard question to answer.

If they say no, then they look irresponsible — after all, one of the key tasks of any government is to prepare for all kinds of terrible things that might happen. If they say yes, however, then they undermine their membership in the single currency. It is lose-lose — but that does not mean it is not going to happen.

The Irish? They will certainly be expected to have a plan in place, given the underlying strength of their economy, and what happened to them last time around. The Spanish? With the rise of their own anti-austerity parties, they will certainly need to prepare for all eventualities. The same is true of the Italians and the Portuguese. Once the questions start, they will be impossible to stop.

The trouble is, that is now how a currency is mean to work. No one ever asks the governor of Virginia what plans he has put in place should the state decide to pull out of the dollar. No one asks the leader of Manchester Council whether they have prepared for leaving the sterling zone, or the leaders of Osaka whether they might replace the yen.

It would be like asking whether they planned to colonize Mars — - the question would be too far-fetched to even be put. It simply wouldn’t happen. That is because properly functioning currency systems are permanent.

The Greeks and the German have changed that. Varoufakis’s legacy is, in truth, a reversible euro. A country might be a member, but only for the moment, and only so long as it works. It will always have a Plan B stored away somewhere, just in case.

And yet, that is not a currency. It is fixed-exchange-rate system. The problem is that fixed-currency systems don’t often survive an economic shock. The euro is staggering on for now. But the chances of it surviving the next big wave or turmoil in the markets have just been dramatically reduced.