How 340.75 drach­mas be­came 1 euro, and who made it hap­pen

A chron­i­cle of the ne­go­ti­a­tions lead­ing up to Greece’s ac­ces­sion to the com­mon Euro­pean cur­rency and how the ex­change rate was cal­cu­lated

Kathimerini English - - Focus - BY YAN­NIS PALAIOLOGOS

It was Satur­day, March 14, 1998, when Theodoros Pan­ga­los trav­eled to Ed­in­burgh for an in­for­mal coun­cil of Euro­pean Union for­eign min­is­ters. The top item on the agenda was ne­go­ti­a­tions for the ac­ces­sion into the bloc of 11 new can­di­date states, in­clud­ing Cyprus. Be­fore he en­tered the meet­ing, Greek cor­re­spon­dents asked Pan­ga­los whether Athens would re­sist pres­sure to link Cyprus’s EU ac­ces­sion to the progress of re­uni­fi­ca­tion talks.

Once the meet­ing ended and that is­sue was re­solved, to the ben­e­fit of both Greek and Cypriot in­ter­ests, Pan­ga­los was blind­sided by a bar­rage of ques­tions on an is­sue he knew noth­ing about: News has leaked from Brus­sels of the de­val­u­a­tion of the drachma and its en­try into the Ex­change Rate Mech­a­nism (ERM).

The fact that the Greek for­eign min­is­ter had not been briefed on this de­vel­op­ment is in­dica­tive of the gov­ern­ment’s se­crecy, aimed at thwart­ing spec­u­la­tion. Five years ear­lier, when Greece had been on the brink of a ma­jor ex­change rate cri­sis, the ERM ac­ces­sion would have seemed im­pos­si­ble to achieve.

Greece, how­ever, had man­aged to over­shoot the tar­gets of the re­vised Con­ver­gence Pro­gram over four con­sec­u­tive years from 1994 to 1997 both in the area of growth and in its fis­cal deficit, which was re­duced from 13.6 per­cent of gross do­mes­tic prod­uct in 1993 to 4 per­cent of GDP in 1997. In­fla­tion dropped from 14.1 per­cent in 1993 to 9 per­cent in 1995, down to sin­gle dig­its for the first time since 1972, and then to 5.6 per­cent in 1997.


Prime Min­is­ter Costas Simi­tis had set a goal for him­self to get Greece into the Eco­nomic and Mon­e­tary Union by 2001 at the latest – two years af­ter the other states but be­fore the euro was in­tro­duced in phys­i­cal form.




tells Kathimerini he ex­pressed “our de­ter­mi­na­tion for ac­ces­sion to the euro” in all of his first meet­ings with the Euro­pean Union heavy­weights – Ger­many’s Hel­mut Kohl, France’s Jac­ques Chirac, Italy’s Ro­mano Prodi and the UK’s John Ma­jor. While they all ap­peared pos­i­tively in­clined ini­tially, they stressed that the Greek econ­omy needed to be ad­e­quately pre­pared for such an im­por­tant step.

Join­ing on Jan­uary 1, 1999, was not pos­si­ble, as one of the en­try cri­te­ria was a min­i­mum two-year stint in the ERM. As Simi­tis wrote in his book “Poli­cies for a Cre­ative Greece, 19962004” (Po­lis, 2005), it was de­cided in a meet­ing on July 15, 1997, with then Fi­nance Min­is­ter Yian­nos Pa­pan­to­niou and Bank of Greece Gover­nor Lu­cas Pa­pade­mos, to aim for Greece’s ERM en­try in the spring of 1998.

The next step was ne­go­ti­at­ing the right ex­change rate.

“We needed a rate that was re­li­able and could be main­tained, that could re­sist pres­sure while at the same time re­main­ing sta­ble so that we could con­tain in­fla­tion,” Pa­pade­mos tells Kathimerini.

The Bank of Greece worked on dif­fer­ent in­fla­tion­ary sce­nar­ios, while analy­ses were also con­ducted by the Min­istry of Econ­omy and Fi­nance and the prime min­is­ter’s of­fice.

The dif­fer­ent analy­ses even­tu­ally con­verged on a de­val­u­a­tion rate of 10-12 per­cent, though there were those who chal­lenged the fig­ures, both as too timid and as too ag­gres­sive.

Pol­i­cy­mak­ers’ at­ten­tion was drawn to a study pub­lished by Na­tional Bank of Greece an­a­lysts Dim­itris Mal­liaropou­los and Gikas Har­dou­velis in Jan­uary 1998. Their anal­y­sis, based on a much more flex­i­ble model of the Greek econ­omy than that used by the Bank of Greece, con­cluded that the drachma was over­val­ued by just 4 per­cent.

Mal­liaropou­los, cur­rently di­rec­tor of eco­nomic re­search at the Bank of Greece, tells Kathimerini that their anal­y­sis went against the preva­lent views at the time, when “many ana- lysts were com­par­ing Greece to un­der­de­vel­oped African na­tions that had un­der­gone ma­jor de­val­u­a­tions.”

Pres­sure buildup

Oc­to­ber 1997 saw the start of a pe­riod of in­tense pres­sure on the drachma as a re­sult of the Asian fi­nan­cial cri­sis and the ex­pec­ta­tions in cap­i­tal mar­kets of its in­duc­tion in the ERM and its con­cur­rent de­val­u­a­tion.

The Bank of Greece – now given more in­sti­tu­tional pow­ers un­der Law 2548/1997 – de­fended the par­ity of the drachma with high in­ter­est rates and ex­ten­sive in­ter­ven­tions in the ex­change rate mar­ket. How­ever, as the pres­sure con­tin­ued to build, the gov­ern­ment de­cided to speed up its en­try bid.

The Greek of­fi­cials han­dling the is­sue and pro­mot­ing Greece’s bid were Pa­pade­mos, Bank of Greece deputies Panayi­o­tis Tho­mopou­los and Ni­cholas Gar­ganas, Pa­pan­to­niou, Pres­i­dent of the Coun­cil of Eco­nomic Ad­vis­ers Yan­nis Stournaras and ad­vis­ers to the prime min­is­ter Nikos Themelis and Tas­sos Gian­nit­sis.

For two months this team em­barked on an in­ten­sive charm of­fen-

was for­mally wel­comed into the com­mon cur­rency bloc in June 2000 dur­ing a meet­ing of the Euro­pean Coun­cil in Santa Maria da Feira, Por­tu­gal, fol­low­ing a fi­nal read­just­ment of the drachma in Jan­uary 2000 at a rate of 340.75 per euro. sive, both on a bi­lat­eral level and within the frame­work of the Eco­nomic and Fi­nan­cial Com­mit­tee (the pre­de­ces­sor of the Euro Work­ing Group) and the gov­ern­ing coun­cil of the Euro­pean Mon­e­tary In­sti­tute (EMI), which would evolve af­ter the in­tro­duc­tion of the euro into the Euro­pean Cen­tral Bank.

The Ger­mans were par­tic­u­larly skep­ti­cal about the Greek pro­posal and be­lieved in the need for a more dras­tic de­val­u­a­tion, even above 20 per­cent.

One-to-one meet­ings be­tween Pa­pade­mos and then Bun­des­bank chief Hans Ti­et­meyer, in which they dis­cussed the ex­change rate as well as broader ac­ces­sion cri­te­ria, were crit­i­cal in sway­ing the Ger­man po­si­tion. Stournaras was fight­ing equally im­por­tant bat­tles at the Eco­nomic and Fi­nan­cial Com­mit­tee, try­ing to win over Juer­gen Stark, then Ger­man deputy fi­nance min­is­ter and later a mem­ber of the ECB ex­ec­u­tive coun­cil, who was al­ready chastis­ing Greece back then for putting too many peo­ple on the public sec­tor pay­roll.

Pa­pan­to­niou also had cru­cial de­lib­er­a­tions with his Ger­man counter- part, Theo Waigel.

In Fe­bru­ary, Stournaras, Tho­mopou­los and Gian­nit­sis held the last round of tech­ni­cal talks with Stark. The fi­nal touches were put to the deal dur­ing a marathon meet­ing in Brus­sels be­tween Stournaras, Gar­ganas and Gio­vanni Rava­sio, the Euro­pean Com­mis­sion’s di­rec­tor gen­eral for eco­nomic and mon­e­tary af­fairs.

On the Satur­day of the cru­cial Com­mit­tee of Eco­nomic and Mon­e­tary Af­fairs meet­ing, Pa­pan­to­niou re­ceived a call from Stournaras, who told him that Greece’s part­ners had agreed to a deal that would, how­ever, come with fis­cal and struc­tural re­form mea­sures.

The prime min­is­ter asked the head of the Coun­cil of Eco­nomic Ad­vis­ers to call him back.

In their sec­ond call, Pa­pan­to­niou ac­cepted most of the ac­com­pa­ny­ing terms but re­sisted the strict timeta­bles pro­posed. The min­is­ter told Stournaras, half-jok­ingly, that if he ac­cepted this kind of con­di­tion­al­ity – a sort of pre-mem­o­ran­dum – then he had best not re­turn to Athens.

In the end, the Greek po­si­tion pre­vailed and the struc­tural re­form con­di­tions were left vaguer than the Ger­mans in par­tic­u­lar had hoped. Stournaras was called upon to sign another doc­u­ment that day – a sworn state­ment that the com­mit­tee had con­vened on a Satur­day, at the re­quest of his Span­ish coun­ter­part, whose wife ques­tioned the pur­pose of his week­end get­away.

The part­ners agreed to a de­val­u­a­tion of the drachma to the tune of 12.3 per­cent and its in­duc­tion into the ERM at a rate of 357 drach­mas per Euro­pean Cur­rency Unit (ECU) with a fluc­tu­a­tion band of +/-15 per­cent.

In Athens that same night, Simi­tis an­nounced the news to the na­tion in a tele­vised ad­dress.

Over the next two years the drachma sur­vived sev­eral ex­ter­nal shocks, such as Rus­sia’s de­fault on its for­eign debts. The Bank of Greece’s pol­icy of high in­ter­est rates, mean­while, in com­bi­na­tion with the ex­pec­ta­tion of euro en­try, led to a fi­nal read­just­ment of the drachma in Jan­uary 2000 at a rate of 340.75 per euro – al­most equiv­a­lent to that fore­seen in the Mal­liaropou­los-Har­dou­velis model.

Greece was for­mally wel­comed into the com­mon cur­rency bloc in June 2000 dur­ing a meet­ing of the Euro­pean Coun­cil in Santa Maria da Feira, Por­tu­gal.

The af­ter­math

Most ex­perts in­side and out­side Greece to­day con­tend that the coun­try should not have joined the eu­ro­zone at the time. Simi­tis dis­agrees.

“You don’t choose the mo­ment for some­thing like that,” he tells Kathimerini. “The right time does not al­ways co­in­cide with the nec­es­sary ma­tu­rity. The coun­try needed a sys­tem­atic ef­fort to im­prove its struc­tures and the way it func­tioned.”

Simi­tis adds that “the ef­fort was not as sys­tem­atic as it should have been af­ter 2001,” in part be­cause of the spend­ing re­quired to pre­pare in time for the 2004 Athens Olympics.

The for­mer prime min­is­ter ar­gues that his gov­ern­ment tried to rein in the gen­eral sense of re­lax­ation af­ter 2000 (he cites Gian­nit­sis’s ef­forts to re­form the so­cial se­cu­rity sys­tem). But he ad­mits that “we should have pre­pared the ground bet­ter for con­tin­u­a­tion of the re­form ef­fort.”

Greek in­fla­tion in the years that fol­lowed euro en­try was well above the eu­ro­zone av­er­age.

This has been at­trib­uted by some econ­o­mists to the in­ad­e­quate de­val­u­a­tion of 1998, which led to the over­pric­ing of nu­mer­ous prod­ucts with the tran­si­tion to the euro.

Gian­nit­sis does not share this view, say­ing that the main driver of in­fla­tion un­der the euro was “that we didn’t play by the rules.”

“Af­ter giv­ing up the de­val­u­a­tion tool, we did not take the struc­tural mea­sures that would have staved off the loss of com­pet­i­tive­ness,” he ex­plains.

The con­se­quences, a decade later, were dev­as­tat­ing.

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