Germany is a nation that has benefited enormously from a single currency (according to my understanding).
A large source of currency fluctuations are trade imbalances. If a country exports more than it imports, its currency appreciates. If it imports more than it exports, it depreciates. For example, if USA imports from the UK are bigger than it's exports to the UK, then USA will be buying GBP with USD (on average), so the value of GBP will go up relative to USD. This would in turn make UK products more expensive to Americans, so they would buy them less, correcting the trade imbalance.
If Greece, Italy, Spain etc. still had their own currencies, they could simply depreciate them (actually, it would happen naturally, as a consequence of trade imbalance) and so reduce their debt in real terms (similar to what has happened to Iceland). If Greece's currency would depreciate, imports would be more expensive for Greeks, so they would import (spend) less, while Greek exports would be cheaper worldwide, so they would export (earn) more.
Conversely, Germany's currency would appreciate, again because of trade imbalances (they export more than they import).
Because of EURO, this hasn't happened, and won't happen - the trade balances are averaged, making Germany's currency (EUR) less valuable than it should be, and Greece's currency (again EUR) more valuable than it should be. This benefits Germany, because it can sell its cars cheaper, but isn't helping Greece, because Greek olive oil and tourism experiences are more expensive than they should be.
The short-term solution is for Germany to admit this advantage and help the under-performing countries (by giving them money, not just loans, and correcting the trade imbalances this way). In the long term, a single currency should lead to a single fiscal government (like in the US).
I wish more people understood this. Germany has benefited enormously because of the euro, and yet you see a lot of belly aching about the southern European countries.
Countries really only have two valves to throttle their economies. Interest rates (which Greece now has the highest in the European Union), and printing more money.
Right now because the Greek economy is in a log jam, they're suffering from deflation and a shrinking economy. Interest rates have to be high so that the government can continue to borrow money to keep the country running, but that means companies aren't leveraging capital to expand.
If Greece weren't part of the Euro, it could simply print more cash, which would reverse the deflationary pressure and allow the government to bring down interest rates. It would also mean the flow of trade from Germany to Greece would probably balance out more because the domestic economy in Greece would be cheaper than importing German goods.
> Interest rates (which Greece now has the highest in the European Union)
The averaged interest rates are actually fairly low for Greece as a lot of its bonds are held by European institutions with very good conditions. The effective interest rate is at 2.4%, slightly lower than even Germanys effective rate. The more interesting value is the debt-service burden, but even though that's higher for Greece, it's still in the same ballpark (it's about the level that the US have).
Still, the debt is horribly high and I don't see a way to repay it. I also don't see a way that Greece can meaningfully default without leaving the EU. That's impossible to sell to Spain, Italy, Portugal, Ireland or might trigger a landslide. Maybe a unified fiscal policy could help. We live in interesting times.
> It would also mean the flow of trade from Germany to Greece would probably balance out more because the domestic economy in Greece would be cheaper than importing German goods.
I read this a lot but I don't quite understand why--How does a unified currency prevent the domestic economy in Greece from being cheaper than importing German goods?
Why can't the local Greece industry lower prices (as it would effectively with a falling local currency), thus driving more domestic purchasing and exports since it would be comparably cheap to neighbouring countries?
The only thing I can think of is that it's hard to synchronize the discount of an entire industry, and nobody wants to go first. Having a local currency and printing more money allows you to do that across the board.
> The only thing I can think of is that it's hard to synchronize the discount of an entire industry, and nobody wants to go first. Having a local currency and printing more money allows you to do that across the board.
That's exactly right. The key point is time.
If you have to wait for your economy to contract, you're still borrowing tons of money to keep the country afloat. You're paying high interest rates on that debt, while at the same time you're losing tax receipts as more and more people are no longer paying taxes but instead are on the dole.
> The only thing I can think of is that it's hard to synchronize the discount of an entire industry, and nobody wants to go first. Having a local currency and printing more money allows you to do that across the board.
Not only that, but if you want to "lower the prices in Greece" (i.e. deflation), you would have to lower the wages of everyone at the same time. That is politically very hard to do.
Because of technology. Fishing in Ithaca costs more than importing fish. The sea in the island is amazing, full of fresh fish. Yet nobody eats fresh fish in restaurants because there are no fishermen left! Same goes for most of other products, in conditions parity there is no way for a Greek corp to fight on price domain a big German corp.
In the medium to long term, it's Eurozone breakup (either partial or complete) or fiscal (and thus political) integration.
I estimate the chance of the Germans ever admitting that the current system is skewed in their favor and actually taking real steps to raise their inflation rate (to counter deflation elsewhere in the Eurozone) and reduce their trade advantages at very close to zero. They're still scared of becoming the Weimar republic, even though they're staring Japan-style deflation in the face.
On the whole, Germans view Club Med as lazy, indolent, irresponsible, and deserving of their fate.
Bring on the Eurozone exits. The sooner the better. Currency unification without fiscal and political unification is a disaster and has plunged half of Europe into a depression as bad as the 30s.
Germans economic power has been enormous before the introduction of the euro, while countries like Greek had been struggling for a long while. Germany not paying reparations to Greece for WW2 might have played a role there.
But why enter in a trade union in the first place? Right, the oligarchs made Greece do it. However borrowing from the Deutsche Bank and expecting them to be nice and fair about it sounds naive to me.
Many people don't get it, but the EU is mainly about trade. Not so much about democracy or social equality. That being said, there is some redistribution of wealth between countries:
A large source of currency fluctuations are trade imbalances. If a country exports more than it imports, its currency appreciates. If it imports more than it exports, it depreciates. For example, if USA imports from the UK are bigger than it's exports to the UK, then USA will be buying GBP with USD (on average), so the value of GBP will go up relative to USD. This would in turn make UK products more expensive to Americans, so they would buy them less, correcting the trade imbalance.
If Greece, Italy, Spain etc. still had their own currencies, they could simply depreciate them (actually, it would happen naturally, as a consequence of trade imbalance) and so reduce their debt in real terms (similar to what has happened to Iceland). If Greece's currency would depreciate, imports would be more expensive for Greeks, so they would import (spend) less, while Greek exports would be cheaper worldwide, so they would export (earn) more.
Conversely, Germany's currency would appreciate, again because of trade imbalances (they export more than they import).
Because of EURO, this hasn't happened, and won't happen - the trade balances are averaged, making Germany's currency (EUR) less valuable than it should be, and Greece's currency (again EUR) more valuable than it should be. This benefits Germany, because it can sell its cars cheaper, but isn't helping Greece, because Greek olive oil and tourism experiences are more expensive than they should be.
The short-term solution is for Germany to admit this advantage and help the under-performing countries (by giving them money, not just loans, and correcting the trade imbalances this way). In the long term, a single currency should lead to a single fiscal government (like in the US).