Let's Understand Greece Crisis

We all are aware that Greece is in deep trouble after defaulting on its debt to the International Monetary Fund.

The Greek economy is shrinking.At such time one of the tool available government is to tinker with the currency. Unfortunately Greeks cannot do so because they share their currency with other nations of the Euro Region.

To Understand their predicament one needs to imagine Euro Zone as a train.

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

Suddenly, few of the passengers in the "Greece" bogie fall sick, so they send a request to the engine driver, via a telecommunication system fitted in the bogie, to speed up. They need to reach their destination fast as they are feeling unwell.

The engine driver sends a message to all other bogies that they have received a "speed up" request from the Greeks due to an emergency.

On hearing this announcement. the German passengers seated in the German bogie take serious objection. They want to enjoy journey at leisurely pace and vehemently object to "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 find him 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.

One of the Greeks regrets his decision to travel by train. He feels has they travel 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. 

 The situation in the 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 up of the Euro train).

These countries are facing a slowdown 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 do devalue currency like we did in 1991.

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 be 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" problems 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.

Basically tinkering of the currency works on the opposite way for two sets of countries. Had Greece own their currency, they would have easily devalued their currency to make exports more attractive.

This would have boosted their economy by creating demand and thereby jobs. This would be like having to travel in their own car instead of being part of a larger train.

Courtesy : TATA AMC