Bring Back the Drachma

05/25/2010 12:44 pm ET | Updated May 25, 2011

It took two tries, but I finally got past the ash cloud and made it to Lisbon to promote the Portuguese edition of my book (Porque E Que o Seu Mundo Vai Ficar Muito Mais Pequeno?). What I found when I got there was a country already preparing itself for the new smaller world that my book predicts.

The European monetary union is a vestige of the old global economic model that is becoming unsustainable. It may have taken triple-digit oil prices, and the massive recession they brought, to drive home the point, but Greece and Portugal are no better suited to a monetary union with Germany and France than Mexico is to one with the United States and Canada.

All eyes in Lisbon these days are trained on Athens, as a bankrupt Greek economy clings to fiscal life-support from its richer euro partners. But more Greeks are realizing that they might be better off if they forgo the bailout and the fiscal austerity measures that come with it, and just leave the monetary union. (What particularly irks the Portuguese is that, as members of the monetary union, they too had to shell out for the Greek bailout, when most suspect their country will be the next target of short-sellers.)

The spending cuts and tax hikes mandated by the terms of Greece's bailout would subtract more than 10 per cent from its economy's GDP. No wonder traders were shorting Greek bonds. No electorate is going to support that scale of austerity, particularly one that has been weaned on massive public subsidies and systemic tax evasion.

Normally, when countries get into this type of fiscal mess, they invariably devalue their exchange rate. But as a member of the European monetary union, Greece has no national currency to devalue. At least not today.

But bring back the drachma and suddenly Greece doesn't have to cut off its right arm to appease the wrath of its lenders. The country wouldn't get bailouts from Germany, but if the drachma falls low enough, Greece's number one industry, tourism, could be bringing in some of that much-needed cash before too long. And at least then German taxpayers could get a holiday on Santorini for their money, instead of just sending a welfare check.

If Greece bolts from the euro, it will have a domino effect. Like the Greek economy, the Portuguese economy relies heavily on tourism. But how will the Azores or the Algarve compete with much cheaper Santorini holidays priced in drachmas unless Portugal follows suits and brings back the escudo. Would the peseta, and perhaps even the lira, be far behind?

For many, the dissolution or contraction of the European monetary union is out of sync with the imperatives of a global economy. Yet it is precisely these types of economic institutions that will find themselves out of sync with the new smaller world just around the corner.