Question

In: Economics

Exchange rates between the countries within the euro area are permanently fixed. Explain why a country...

Exchange rates between the countries within the euro area are

permanently fixed. Explain why a country like Greece, which is part of the euro zone,

may want to abandon the euro in favour of its own currency and flexible exchange rates

Solutions

Expert Solution

The great majority of Greeks want to abandon the Euro. It brought nothing but stagnated wages, tripled prices in goods and services, exorbitant taxation (including abhorrent VAT-rates which is the most unfair tax to begin with) and an uncontrollable unemployment, touching 50% for the ages 20-35. Who in their right mind would want to remain under such an economic occupation a day longer?

The problem is that under the Euro (and mainly because of it) the National debt was almost doubled, from 180 billion Euros in 2009 to 340 billion Euros it is today. You see, every time you heard of a "rescue plan" it was instead money that went directly to the banks (that for 30 years were overcharging Greece for being of a higher risk - yet never planned to take this risk, it turns out) - and this money were the funds amassed from the Greek population by overtaxing them. Germany only put out warranties and ended up making about 100,000,000 Euros in profit from interest payments and lower premiums alone.

In 2008 abandoning the Euro made perfect sense. In 2010 it became a necessity. Yet, in 2016, it would now be practically impossible for Greece to deal with a doubled national debt if we were to revert to the Drachma - without the required debt relief similar to the one Greece offered to Germany in 1953.

If Greece were enjoying a patriotic government, they could unilaterally declare the debt deductible from Germany's remaining debts to Greece, that by now have been calculated to be around 280 billion Euros. Unfortunately, even the Tsipras government proved to be more concerned with remaining in power than actually making good on the platform that got them elected.

And now Germany's repeated refusals to accept the IMF's conclusions that the Greek debt can only be serviced if seriously cut, start to make more sense.


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