Thursday, July 7, 2011

Capital Controls For Greece?

If one allows redemption of accounts into currency, the currency can be mailed, trotted across borders, zapped by PayPal against credit cards, sent by Western Union, or many other options. I think it would be impossible to shut them all down at once. The Greek government could try, but.....they cannot even collect taxes due. Carrying currency across the border would be the hardest one to stop, although it might not be the most important external channel for getting funds out of the country. They could search people at the border, much as the U.S. government now searches us for who-knows-what before a plane flight.

A second scenario freezes bank accounts and doesn’t worry too much about currency leakage. Instead, it stops people from adding to their currency holdings, or at least tries to. The Greek economy then has to do without currency withdrawals for some time, until the new drachma currency is ready.

Which is the more feasible option? Is either at all an option? What am I missing? Without some kind of capital controls, a move away from the euro simply drains the country of its euros.