Simple solution for Greece: Adopt the dollar !!!!!

LONDON (MarketWatch) — The story that Iceland might ditch the krona and adopt the Canadian dollar instead was one of the more intriguing news items of last week. But it didn’t seem to have much support. The sensible Canadians, who came through the credit crunch with hardly a scratch, quickly decided they didn’t want to take on responsibility for Iceland’s financial “innovators,” even if they might be more chastened these days than they were for most of the last decade.

There is, however, a dramatic currency switch that might just work: Greece ditching the euro EURUSD -0.42% , and adopting the dollar instead.

Crazy? Not completely. In fact, it might well be one of the few viable ways to get Greece out of its current mess. And if President Barack Obama could pull a plan to save Greece, and with it a fragile global economy, out of the hat in the autumn it wouldn’t exactly hurt his chances of re-election.

Despite a temporary stay-of-execution with its latest debt restructuring, Greece is no more fixed than it has ever been.

True, no less a person than French President Nicolas Sarkozy has assured us that with the latest debt restructuring the crisis is over and we can all start worrying about something else. But of course it isn’t fixed at all. Greece is still in a deep economic hole. Its economy may shrink by another 6% this year. Youth unemployment is now above 50%. There is zero sign of stability let alone growth, which means the debt burden keeps rising. Elections are on the horizon, which could well see extremists come to power. If the new government starts to renegotiate the terms of the bailout package, as it might well, the whole thing could unravel and everyone would be back to square one.

Meanwhile, the Greek economy continues to slip into an abyss. The latest bailout deal salvages some money for the banks but does nothing for Greece itself. As part of a fresh round of austerity measures demanded by its euro-zone partners, the government is pushing through cuts in government salaries and in the minimum wage. As people’s pay goes down, they going to spend less money, more businesses will go broke, and unemployment will keep rising. In reality, Greece is being forced to double-up on the same austerity, zero-growth policies that got it into this mess in the first place. It seems precisely nothing has been learned from the last two years.

But actually there is a simple solution that few people have yet considered. I am indebted to Georgios Gialtouridis for making the suggestion to me. Greece could simply swap the euro for another big global currency — the dollar.

Once you start to think about it, it makes a certain sense.

It is very hard for Greece to pull out of the euro unilaterally. This is a country that runs a substantial trade deficit, and no longer has any realistic ability to borrow money. If it introduced a new drachma overnight, it would collapse in value. For a while it might be quite literally worthless, in the way the Zimbabwean currency was. No one would want to accept it. It can’t hope to pay for its imports. In extremis, it might not be able to pay for oil and medicines. Indeed, there are already reports that oil traders are reluctant to sell to Greece. If they were offered drachmas they certainly wouldn’t.

The risk is that the nation would collapse. Indeed, the fear of that may now be all that is keeping the Greeks in the single currency. But imagine if it simply switched to the dollar. Overnight, all Greek euro contracts would be re-denominated in dollars at a rate of one to one.

That would have two big advantages.

The dollar trades at about 30% less than the euro, so Greece would have devalued by 30% at a stroke — which, luckily enough, is roughly what it needs to do to restore competitiveness.

Yet at the same time, it would have a hard currency. No one selling things to Greece would mind being paid in dollars. It is acceptable everywhere.

Of course, the Federal Reserve would have to be willing to extend liquidity to Greek banks. But it has done that for foreign banks in the past. Indeed, it already swaps dollars with the European Central Bank. And there has been talk of the Fed buying up peripheral country debt to stop the euro collapsing. So there is nothing to stop it supporting Greece — and it is not as if the Fed is exactly averse to printing a bit more money.

Over time, Greece might go back to the drachma. It could push through more structural reforms, reap the rewards of its devaluation, and, as its economy started to recover, it could start planning to introduce its own currency. And it could do so from a position of strength, not weakness.

Or if it found it wanted to be part of a larger currency zone, it could just stay with the dollar. Maybe it would have trouble keeping up with the U.S. — but probably not as much trouble as it had keeping up with Germany.

What’s in it for the U.S.? Simple. Stability. Greece is a strategically important country. The Truman Doctrine of 1947, which laid the basis for the Marshall Plan, and the Cold War policy of containment, was specifically aimed at stopping Communist expansion in Greece and Turkey.

The U.S. has just as much of a stake in a stable Greece in 2012 as it did in 1947. On top of that, it would be neat riposte to anyone who suggests the dollar is in long-term decline: it would stop any talk about the euro replacing the dollar for a very, very long time. And the 3 million Americans who claim to be of Greek descent would be pleased as well. Indeed, for President Obama, saving Greece by letting it switch to the dollar might be the perfect surprise to pull off going into an election.

Matthew Lynn

Matthew Lynn is chief executive of Strategy Economics, a London-based consultancy. His latest book, ‘The Long Depression: The Slump of 2008 to 2031,’ is published by Endeavour Press.