Economic Crisis in Greece and its Impact on the Euro Essay

Economic Crisis in Greece and its Impact on the Euro - Essay Example The levels of debt and shortfalls surpassed the limits that have been set by the euro zone (CNN). As per the Euro is concerned, since its introduction in the year 1999, its value had declined substantially against the US dollar, as well as certain other currencies. The flaw was to a degree credited to outflows of capital from Europe. However, by 2007, the euro was valued at 53 percent higher than its value that was in 2001. The high interest rates in Europe in comparison to US interest rates had triggered the rebound of the euro, and attracted inflow of capital into Europe (Madura, 167). The report conveys a detailed study on the economic crisis prevailing in Greece and its impacts on the Euro. Background to the Crisis: The euro zone was incepted in the year 1999, and several independent states forsaken their own national currencies in support of a universal currency, the euro. The euro was mainly adopted because a number of advantages were expected to get bestowed by the monetary un ion on the countries that participated. Countries like Greece, which generally have high inflation, the adoption of euro could benefit by lowering the inflation and the nominal interest rates as well. Lower inflation rates encourage greater borrowing and lending, decreases the possibility of competitive devaluations, introduces a common measure of value across countries thus bringing transparency in competition across countries, and also reduces risk by eliminating exchange rate fluctuations. These advantageous features of a common currency subsist till price stability is delivered by the central bank of the monetary union and is plausible. In the case of the euro zone, the European Central Bank had rapidly recognized its anti-inflation recommendations and became credible (Provopoulos, 1-2). In spite of the above mentioned advantages, there are certain costs relevant to the adoption of euro as the common currency. A country joining the euro zone becomes incapable of setting its own domestic economic policy. Also, it no more possesses the ability to alter the nominal exchange rate of its currency. Low financial discrepancies and resilient labor and product markets is particularly important in the euro zone. The euro zone does not have a fundamental economic power that can restructure economic properties from a low-unemployment area to a high-unemployment area to lessen the consequences of unbalanced distress. Also, owing to differences in language and culture among the different countries in Europe, labor is more mobile in the United States than in here. Hence, regulation systems are required for the euro zone at a national level. Lower economic inequity and elastic product and labor markets offer mechanisms to ease the modification to alarms (Provopoulos, 2). The Greek Economy 2001-2009: With the entry into the euro zone, the Greek economy seemed to enter a new period experiencing strong development and low price rises. The changes brought about in the economi c environment with the adoption of the euro provided crucial benefits for a country like Greece that had experienced constant budget deficits, and high inflation rates levels from the early-1980s till the mid-1990s. However, along with the advantages, long term