The euro problem

Date posted: February 24, 2012

The economic problems in Europe with the euro and potential default of some countries continue. N.C. State University economist Mike Walden gives a thumbnail sketch of the essential issue.

“Well … I would file this under ‘trying to have your cake and eat it, too.’ Here’s the problem: Europe — a lot of Europe — went to a one currency system, the euro. However, what that means is individual countries no longer have an individual currency. And changes in the value of a country’s individual currency actually serve as a regulator.

“How so? Well, what if you’re a country like Greece, who has overspent, maybe is in a recession, and investors don’t want to go anywhere near Greece? What would happen is if Greece had their own individual currency, the value would go down. What that would do is, obviously, make Greece poorer. They wouldn’t have as much to import — wouldn’t have as many resources to import. However, their exports would be cheaper, and indeed that exporting more and importing less would help them dig out of their economic problems.

“When they’re on a systemwide currency like the euro, there is not that regulator. So, Greece’s problems continue to fester, because they don’t have this individual currency that can change. And Europe — the European countries — don’t want to give up the euro for all these countries, so they’re sort of between a rock and a hard place — even though they have to bail out, essentially bail out Greece, give them money, or they have to say, ‘Well, Greece, you know what, you’re going to be on your own. Go back to the drachma, go back to your individual currency.’

“So, I think this is an example of where you may have a plan, but if you don’t recognize there are a lot of working parts here that plan can fall apart.”

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