Greece is experiencing a severe economic crisis due to its debt default and the impact of austerity measures, which many citizens blame for ongoing issues. The country is unable to devalue its currency, the euro, because it shares it with other nations, hampering its ability to improve its economic situation. This predicament highlights the challenges faced by struggling economies within the eurozone, where interests diverge between debt-laden countries and those like Germany that are economically stable.

1. GREECE CRISIS

2. GREECE CRISIS
We all know Greece is in deep trouble after defaulting on its debt to the
International Monetary Fund.
Many Greeks blame the austerity measures for much of the country’s continuing
problems. The leftist Syriza party rode to power this year promising to renegotiate
the bailout.
The Greek economy is shrinking. At such times one of the tools available with
government is to tinker with the currency. Unfortunately the Greeks cannot do so
because they share their currency with other nations of the EURO region.

3. To understand their predicament
one needs to imagine the EURO
ZONE as a train.
GREECE CRISIS

4. Now imagine the various
countries as the bogies
(compartments) of this train.
Let’s say the train is trudging
along smoothly and all seems
well.

5. GREECE CRISIS
Suddenly a few of the passengers in the “Greece” bogie fall sick. So, they send
a request to the engine driver, via a telecommunication contraption that is
fitted in the bogie, to speed up. They need to reach their destination fast as
they are feeling unwell.
The engine driver then sends a message to all the other bogies that they have
received a “speed up” request from the Greeks due to an emergency.

6. GREECE CRISIS
On hearing this announcement, the German passengers seated in the German
bogie take serious objection. They want to enjoy the journey at a leisurely pace and
vehemently object to the “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.

7. The engine driver finding
himself 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.

8. Let us see the formula of the Current Account Balance (CAB)
CAB = X - M + NI + NCT
X = Exports of goods and services
M = Imports of goods and services
NI = Net income abroad [Salaries paid or received,
credit / debit of income from
FII & FDI etc. ]
NCT = Net current transfers [Workers' Remittances
(unilateral),
Donations, Aids & Grants,
Official, Assistance and
Pensions etc]
CURRENT ACCOUNT DEFICIT
One of the Greeks regrets his decision to have
travelled by train. He feels that had they travelled
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.
GREECE CRISIS

9. GREECE CRISIS
The situation in 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 of the Euro
train).
These countries are facing a slow down 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 to devalue the currency.

10. GREECE CRISIS
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 by
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”
problem 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.

11. GREECE CRISIS
Basically the tinkering of the currency works in opposite ways for two sets of
countries. Had Greece own their currency, they could have easily devalued
their currency to make their exports more attractive.
This would have boosted their economy by creating demand and thereby
jobs. This would be like their having to travel in their own car instead of being
part of a larger train.

12. GREECE CRISIS
Hope the above example would have helped you to understand the currency
dilemma that is causing concern to several European countries like Greece, Italy,
Spain, Portugal and Ireland who find themselves sinking in debt.
Also, hope this lesson has also clarified why some other countries of the European
Union like Germany do not share the needs of the weaker nations and hence their
currency strategy runs opposite to that of the troubled nations.

13. Please give us
your feedback at
professor@tataamc.com

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