What is going on in Greece? Lots of things. There are so many articles on the situation in Greece that I thought it would be a good idea to add to the noise with my own little bits of information. Before we can ask what is happening in Greece I think we need to understand what the Euro is exactly. Yes, it’s the EU’s currency. That is easily understandable. What is not clear to many is people is why the EU members chose to adopt a common currency in the first place. There are advantages and disadvantages to doing this and when the Euro was adopted all the members obviously decided that the benefits outweighed the shortcomings and the world got the Euro. A common currency has:
– Resources that are normally used to convert currency between countries that do a lot of trade can be used in more productive ways. This saves all the currency conversions that would need to take place everyday as goods/services moved from country to country. Trade goes up!
– Stable monetary policy. In Canada since 1991 we have enjoyed very stable monetary policy. Our central bank shoots for a 2% inflation target and has been able to keep it close. Smaller countries with less stable governments or central banks do not enjoy this same privilege. High inflation or unstable monetary policy in general leads to an unpredictable market. Investors don’t like unpredictable and so they stay away. With one central bank to control policy for all EU countries the idea was that it would bring stability.
– Purchasing power. Since the market using the currency is larger it creates a larger market for goods/services to be sold in. This is supposed to lower prices.
– No floating exchange rate. Floating exchange rate is what Canada has. Our dollar can move against the US dollar and all other currencies in the world as people feel our country is more or less desirable for investment or they want more/less of our goods.
– No national monetary policy. In Canada, the bank of Canada decides how much money to print. Meaning that they control inflation. With a common currency like the Euro all members of the union must agree that they want the same level of inflation. Imagine if Canada and the US started using some new common currency, let’s call it the Loonback. A bank would be set up to give out the Loonback at a certain rate. Right now Canada sets a 2% inflation goal, the US has no official target other than to keep prices stables. The Loonback bank would need to have some policy that makes both countries happy. This can be a good thing but if one country finds itself in a situation where it needs to devalue its currency and can’t, bad things can happen.
More on this in the near future. I promise not all posts on this site will be this boring.