Greece, in particular, is struggling to pay its debt and has to borrow money at ever higher interest just to repay the interest on existing debts. Greece's options are to cut spending and raise taxes, effectively, a structural adjustment. The fear is that there isn't sufficient political will to do this or even where there is, such cuts will further contract the economy thereby worsening the problem as the ratio of debt to GDP increases.
In the absence of currency union, Greece could have, where the above options proved insufficient, exercised the option of devaluing its currency as a way of managing its debt. It works this way; if Tanzania Govt's annual budget is 150b which converts to $1b and this includes debt interest payment of $100m(15b) per annum; by devaluing to say 300 to 1USD, we will, all things being equal, need only $450m to meet the remainder of our budgetary needs whilst leaving spare cash to pay back the foreign denominated debt.
Greece doesn't have this option as it's stuck in the Euro which it has no power to devalue. At some point, countries like Greece and the other PIIGS will have to decide whether their interests are best served by remaining in the Euro. This, more than anything, is the key problem facing the Euro.
On Wed, Jul 11, 2012 at 5:48 PM, Yona Maro <oldmoshi@gmail.com> wrote:
This paper gives an overview of the causes of the European debt crisis and the consequences for the external relations. It finds that political mishandling has increased uncertainty, which has contributed to a tendency for the euro to become weaker.
http://adbi.org/files/2012.07.11.wp370.europe.debt.crisis.effects.pdf
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