Several experts have said that the Euro has to be broken up and some countries, like Greece,should issue their own currency. How will this help to solve the debt crisis in Greece?
Greece now issue government bonds in Euro. Because of the risk of insolvency, the interest rate on these bonds have shot up. If Greece were to leave the Euro zone and issue their bonds in their own currency, i.e. the Drachma, the interest rate will be even higher as the investors have to face the risk of default and depreciation in the currency.
How will having their own currency help the Greek government? I have an interesting observation. The Greek government is not able to collect sufficient tax revenue to pay their expenses - e.g. due to tax evasion. They can continue to fund their deficit with debt in their currency. The interest rate will shoot up and the currency will depreciate over time. The depreciation in the currency is a way of lowering the standard of living for the people, who are living beyond their means. It is also an indirect way of taxation.
High inflation has its other negative impacts but this is a separate matter. It seems to be a good idea for each country to have its own currency, rather than to join a strong currency like the Euro.
There was a similar situation during the Asian Financial crisis. The currencies of several Asian countries were pegged to the US dollar. As this was unsustainable, the pegs were broken, leading to quite severe damage. After the currencies were unpegged, they were able to adjust to their right level and their economy regained their strength.
It looks like the Euro will have to break up.
Greece now issue government bonds in Euro. Because of the risk of insolvency, the interest rate on these bonds have shot up. If Greece were to leave the Euro zone and issue their bonds in their own currency, i.e. the Drachma, the interest rate will be even higher as the investors have to face the risk of default and depreciation in the currency.
How will having their own currency help the Greek government? I have an interesting observation. The Greek government is not able to collect sufficient tax revenue to pay their expenses - e.g. due to tax evasion. They can continue to fund their deficit with debt in their currency. The interest rate will shoot up and the currency will depreciate over time. The depreciation in the currency is a way of lowering the standard of living for the people, who are living beyond their means. It is also an indirect way of taxation.
High inflation has its other negative impacts but this is a separate matter. It seems to be a good idea for each country to have its own currency, rather than to join a strong currency like the Euro.
There was a similar situation during the Asian Financial crisis. The currencies of several Asian countries were pegged to the US dollar. As this was unsustainable, the pegs were broken, leading to quite severe damage. After the currencies were unpegged, they were able to adjust to their right level and their economy regained their strength.
It looks like the Euro will have to break up.
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