The Euro & Greece’s Woes

Many argue that Greece’s current woes are largely a result of Greece’s membership in the euro zone. They’re actually partially right. However, they’re wrong about the reason why the euro has contributed to its crisis.

They usually asserts that it’s because the Greek economy needs devaluation to kickstart its economy. But while devaluation will boost nominal GDP as nominal export revenues (which in Greece is mostly from service exports in the form of tourism) increases it will also reduce domestic demand as domestic purchasing power is reduced by higher inflation. And so, real GDP won’t increase as the increase in inflation cancels out the increase in nominal GDP.

The link between the euro and Greece’s woes instead consists of the fact that in a monetary union, like in a gold standard, there is a separation between the state and the “printing press”. As long as a state has a “printing press” that prints the currency that it borrows in, and that the currency has a floating exchange rate, it is shielded ( except under very extreme and rare circumstances) from market pressure as the central bank can buy unlimited amounts of government debt, so even if no private investors want to buy government bonds, it won’t face a debt crisis.

If a government, like Greece (or Puerto Rico), however lacks a “printing press” then they will face a debt crisis if investors refuse to buy the bonds they need to issue to finance deficit spending or refinance expiring bonds.

For those of us who oppose deficit spending, that is to some extent a virtue with monetary unions, as it creates a strong incentive for governments not to spend more money than they earn. However, just like for example reductions in unemployment benefits or harsher punishments for criminals hurts those who for whatever reason don’t respond to the incentive these measures create, this incentive will hurt countries that don’t respond to that incentive and still engage in irresponsible deficit spending, like Greece.

The fact that Greece chose to have monetary arrangements that created an incentive against deficit spending and yet still engaged in irresponsible deficit spending partly reflected that the political class was corrupt and short-sighted and partly reflected ignorance of the fact that giving up the “printing press” makes deficit spending far more dangerous for a country.



  1. Greeks and Southern Europeans in general were very smart about free-riding at the German taxpayer’s expense (including German banks who had to be recapped via the backdoor ECB mechanism). The EUCCP apologists complaining about Greece unable to print it’s ‘own’ currency never talk about how the monetary union was also responsible for the good times as the spread between German & Hellenic bonds was never that low before the Euro.

    Keep up the good work Stefan!

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