Chucking the euro won’t be a bad step for Greece

This article appeared originally in Gulf News: link to original article

We are apparently back to the talk of whether or not Greece can do without having the euro as its currency. The argument was raised before, is being raised now, and will be raised again as long as countries using the euro do not seem to be aligned in a way where a set of monetary policies would work for all.

When the argument was first raised at the peak of the financial crisis, there was a part which stated that the euro is no more the same currency in all countries which use it as its main one. So the euro in Greece was cheaper than that in Germany and so on due to different variables affecting a country’s economy.

We should also remember how Cyprus introduced capital controls to avoid the flight of euros from its economy. There, the euro was also considered cheaper.

So why is an old argument being revived? And how can a currency be cheaper somewhere within a region but more expensive in another part of the same region?

Any independent country using the euro and is under the mercy of the European Central Bank (ECB) has no authority to control its own monetary policies. That is a given. And therefore, there is no control over what amount of money should be circulating in an economy.

However, when a crisis comes home, and countries are affected differently, the end results are different too. Let’s discuss this further. With reference also to Germany and Greece, the composition of each economy matters a lot to what happens in a scenario where a financial crisis settles in.

So, no matter how hard the ECB tries to set an interest rate that optimises the effect on all countries using the euro, there will be big losers as likely as there are big winners. The euro would be cheaper with a lower interest rate, and yet, it would benefit a country with a better balance towards exports than the contrary.

Why was it then said that euros were cheaper in Greece? Probably the notion that there should be a cheaper domestic currency.

Back to Germany and Greece and the composition of their economies. Germany has a very good balance between exports and household consumption, if not the best. That allows it a decent manoeuvring space when unemployment rises as the effect is pretty much subject to what sectors are hit and how much they make of the entire exporting sector.

The same cannot be said of Greece’s economy. With household consumption exceeding 70 per cent and net exports being negative, the situation is already dire. When considering that tourism makes a sixth of Greece’s economy, it leaves no doubt that any trough in the world’s business cycles will lower such revenues significantly.

As countries do retain control over their fiscal policies, loss of revenues would mean borrowing money to finance the government in what it does to hopefully get the economy back on track. Greece did also privatise many publicly owned assets.

Ask yourself this: why did Poland join the EU, but has retained its own zloty? Then research Poland’s economy and check how well it has performed in past years despite the turbulence that many economies around have been going through. The zloty and euro are not pegged by the way.

According to the European Commission, there is no target date for adoption of the euro unlike the case with Lithuania and Romania. Looking around, would Poland really want to? Holding euros and coming from a Schengen Area country, you hold a higher purchasing power in Poland than you would have in any other country using the euro, including Greece. Despite prices in Greece being relatively lower.

Having an independent currency floated against the euro, like the case in Poland, might have proven much better for Greece. It would have also served its quite huge services’ sector better than having the euro over the years and would have kept tourism thriving through the ups and downs. The last question I want to leave you with is: what should Greece do now? (Hint: for an euro exit option, a fixed exchange rate should be adopted initially to avoid major blows to a struggling economy).

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