Currency valuation is ineffective and dangerous

One of the primary justifications given by the proposition for departing from the Euro has been the positive effects of currency devaluation.[i] Following the example of China, side proposition believe that an economy can be made more competitive- a more attractive trading partner for foreign businesses and states- by devaluation of its currency. The cheaper a state’s currency becomes in relation to reserve currencies like the dollar, the Swiss franc or the yen, the greater the volume of goods that a foreign buyer with access to dollars or yen will be able to buy from that state. The greater the demand for discounted exports from a state that has pursued a policy of devaluation, the faster its economy will grow. If Italy, for example, were allowed to devalue its currency, it would be able to offer exporters fabrics at a cheaper rate than China, its closest competitor. An increase in demand would provide a ready supply of business to the Italian garment industry, which would record higher profits and employ more labourers. What has not been considered, however, is that demand for Chinese exports would be high anyway, notwithstanding the Chinese government’s artificial suppression of the value of the yuan. The case of Greece neatly illustrates the difference between an uncompetitive economy in need of monetary reform and a defective economy in need of fiscal reform. The total value of all Greek exports during 2009 was equivalent to 19% of its GDP. By contrast, in the same year, Greece spent an amount equal to 31% of it GDP on buying goods from other countries.[ii] During 2010, while mired in the worst peacetime crisis in its history, Greece still managed to spend 11% more on importing goods than it earned by exporting goods. Greece’s consistently negative trade balance indicates that its export economy is severely defective. Put simply, Greece isn’t selling anything that its trade partners want to buy. The negative deficit may even imply that its own economy isn’t able to satisfy domestic demand; if Greek manufacturers are not producing goods that Greek citizens want to buy, those goods will be imported from other states. Over the last eighteen months the problems affecting the Greek economy have become even more apparent to the outside world. Closed shop unions control a diverse range of businesses, including passenger taxis, road haulage and even hair dressing. Overly generous public pensions and endemic early retirement causes attrition within the Greek workforce than cannot easily be counteracted, due to young Greeks’ delayed entry into the labour market. Modernisation of Greece’s commercial shipping fleet- one of its largest assets- has been chronically slow, while widespread and pernicious tax evasion and fraud has reduced the revenues of the Greek state. Crippled by the cost of repaying the loans that it took out to cover public spending before the 2007-2009 world financial crisis, the Greek government is unable to stimulate its economy by investing in new infrastructure projects. Under these circumstances, the break-up of the Eurozone and subsequent devaluation of the drachma will not enhance Greece’s competitiveness. Instead, the minting of large quantities of currency (printing money is a popular method devaluation) will serve only to trigger excessive inflation, which may even trip in to hyper-inflation. [i] Kovacheva, Ralitsa, ‘EEAG: Greece should leave the euro area and devalue the drachma’, euinside, 2 March 2011, http://www.euinside.eu/en/news/eeag-greece-to-exit-from-the-euro-area-and-to-devalue-the-drachma [ii] WorldDataBank, http://databank.worldbank.org