GREECE CRISIS

We all know Greece is in deep trouble after defaulting on its debt to the International Monetary Fund. Many Greeks blame the austerity measures for much of the country’s continuing problems. The leftist Syriza party rode to power this year promising to renegotiate the bailout. The Greek economy is shrinking. At such times one of the tools available with government is to tinker with the currency. Unfortunately the Greeks cannot do so because they share their currency with other nations of the EURO region.

To understand their predicament one needs to imagine the EURO ZONE as a train. GREECE CRISIS

Now imagine the various countries as the bogies (compartments) of this train. Let’s say the train is trudging along smoothly and all seems well.

GREECE CRISIS Suddenly a few of the passengers in the “Greece” bogie fall sick. So, they send a request to the engine driver, via a telecommunication contraption that is fitted in the bogie, to speed up. They need to reach their destination fast as they are feeling unwell. The engine driver then sends a message to all the other bogies that they have received a “speed up” request from the Greeks due to an emergency.

GREECE CRISIS On hearing this announcement, the German passengers seated in the German bogie take serious objection. They want to enjoy the journey at a leisurely pace and vehemently object to the “speed-up” suggestion. Their contention being that they had paid a premium for enjoying this leisurely journey and were not prepared to get short-changed. They caution the engine driver that if he were to “speed up”, then they would demand a refund.

The engine driver finding himself in an “impossible” situation is left with no choice but to maintain status quo. The Greeks are left with no choice but to suffer their ordeal.

Let us see the formula of the Current Account Balance (CAB) CAB = X - M + NI + NCT X = Exports of goods and services M = Imports of goods and services NI = Net income abroad [Salaries paid or received, credit / debit of income from FII & FDI etc. ] NCT = Net current transfers [Workers' Remittances (unilateral), Donations, Aids & Grants, Official, Assistance and Pensions etc] CURRENT ACCOUNT DEFICIT One of the Greeks regrets his decision to have travelled by train. He feels that had they travelled by their own car, the decision of speeding up would have been theirs. But now since they are a part of the train, they can do little to influence its speed. GREECE CRISIS

The situation in Europe is similar to the story of the Euro train. The common currency, “EURO” is like the train. Some countries like Greece, Italy, Spain, Portugal, and Ireland are not comfortable with the valuation of the EURO (it is exactly how the Greeks were not comfortable with the speed of the Euro train). These countries are facing a slow down and need to revive their economy. One of the best ways to do that is to sell more products to the world and reduce debt. And in order to do that, it is vital to devalue the currency.

GREECE CRISIS But since the currency (EURO) is common for all the countries, just a handful countries cannot decide about changing the valuation of the EURO all by themselves. This is just like how the Greeks in the EURO train failed to “Speed- Up” the train. For countries like Germany and France who are not in a “debt” problem like the Greeks, a reduction in the value of the EURO works against their interest because it unnecessarily makes their imports more expensive and prices of commodities in general increases.

GREECE CRISIS Basically the tinkering of the currency works in opposite ways for two sets of countries. Had Greece own their currency, they could have easily devalued their currency to make their exports more attractive. This would have boosted their economy by creating demand and thereby jobs. This would be like their having to travel in their own car instead of being part of a larger train.

GREECE CRISIS Hope the above example would have helped you to understand the currency dilemma that is causing concern to several European countries like Greece, Italy, Spain, Portugal and Ireland who find themselves sinking in debt. Also, hope this lesson has also clarified why some other countries of the European Union like Germany do not share the needs of the weaker nations and hence their currency strategy runs opposite to that of the troubled nations.

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