What it means
The modern drachma was introduced in 1832 after Greece became independent, and it remained the national currency for nearly 170 years. Over the twentieth century, it lost a great deal of value because of inflation, wars and repeated devaluations, which are deliberate cuts in a currency's official exchange rate.
By the 1990s Greek policymakers were working to bring inflation and deficits under control so that the country could join the euro. Greece entered the euro area on 1 January 2001.
The conversion rate was fixed at 340.75 drachmas to one euro, and euro banknotes and coins replaced the drachma in early 2002. Fixing the rate meant that prices, wages and contracts in drachmas could be converted exactly.
Joining the euro gave Greece lower borrowing costs and easier trade, but it also removed the ability to devalue its own currency. When the debt crisis hit in 2009 and 2010, Greece could not make its goods cheaper simply by letting its currency fall.
Instead it had to cut costs and public spending, a process often called internal devaluation, which was painful and slow. This history is why the drachma comes up in debates about a possible return to a national currency.
Supporters of the idea argued that a new drachma could be devalued and could help exports, while opponents warned of inflation, bank runs and a collapse in savings value. The question became known as Grexit.
For business readers, the drachma is a case study in what happens when a country gives up its own currency. Old contracts, assets and accounts quoted in drachmas had to be restated in euros, and the experience shows how currency regimes affect pricing, borrowing and risk.
In practice
Real-world examples.
Example
A Greek importer is holding a supplier invoice in drachmas when the euro arrives. Because the conversion rate was fixed at 340.75 drachmas to the euro, the finance director can restate the invoice in euros exactly and update the ledger without any dispute over the exchange rate.
Example
A European bank with branches in Athens updates its systems before 2002 so that every customer account, loan and price list can show euros instead of drachmas. The project requires careful testing so that rounding differences do not accumulate across millions of accounts.
Example
An economics student compares Greece before and after joining the euro. She sees that while the drachma was in use the country could devalue to boost exports, and that this option disappeared once the euro became its currency. Her essay concludes that the trade-off was lower interest rates and trade costs in return for less policy freedom.
Formula
Calculation
Euro amount = Drachma amount / 340.75
Drachma amount = Euro amount x 340.75
Suppose a Greek company had a contract valued at 3,407,500 drachmas at the time of conversion. Euro amount = 3,407,500 / 340.75 = 10,000 euros. Checking the other way, 10,000 x 340.75 = 3,407,500 drachmas. A balance of 340,750 drachmas would be exactly 1,000 euros, and a price of 34,075 drachmas would convert to exactly 100 euros.Case study
Seen in the real world.
Aegean Textiles is an illustrative, fictional Greek exporter that sold fabrics in several European countries. In the years before the euro, its finance team often saw margins squeezed when the drachma strengthened against its customers' currencies.
After the changeover, the company no longer faced exchange rate swings on sales to other euro area countries. The finance director estimated that this saved the firm about $150,000 a year in hedging costs and reduced uncertainty in its budgets.
However, when costs at home rose faster than prices abroad, the company could no longer rely on a falling currency to restore competitiveness. In this illustrative story it had to find savings through productivity and lower costs, which shows both the benefit and the limit of giving up a national currency. The finance director later summed it up by saying the euro had removed one risk and exposed a harder one.
Watch out
Common mistakes.
- Thinking Greece still uses the drachma, when it adopted the euro in 2001 and the drachma is no longer legal tender.
- Confusing the date of joining the euro with the date of banknotes appearing, as notes and coins were introduced in early 2002.
- Believing a return to the drachma would be a simple switch, when it would involve redenominating contracts, bank accounts and debts.
Questions
People also ask.
What was the drachma conversion rate?
It was fixed at 340.75 drachmas per euro.
Can drachma notes still be exchanged for euros?
Drachma banknotes could be swapped for euros at the Bank of Greece for a limited period that has now ended, so any remaining notes are mainly collectors' items.
Why did Greece join the euro?
Greek leaders wanted lower inflation, lower interest rates and closer integration with Europe's economy.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related