On the Cliff of Economic Change - Is Greece or Germany the Key?

If you haven't heard about it already, then you must either live in a bubble, or don't really care how the economy works, but right now there is a lot of pressure on Greece to reform its public spending as a whole. The Greeks are being asked to change a whole load of things in a bid to help repay the bail-out that has been guaranteed to their government on behalf of the other eurozone countries in a bid to stabilize the Euro. Of course the other countries are doing it for 'selfish' reasons, which is fine. I mean, why should they have to suffer for the mistakes of others? This is why the Spanish are out and about carrying on with 'very angry protests' about the newly proposed reforms.

But that's only the tip of the ice-berg. The real change is going to happen based on whether or not the Greek government finally accepts the prerequisites given to it by the EU (and IMF).  Of course, the Greek people are not at all pleased at the prospect of losing a majority of their services to privatization. Who can blame them? Here in England 'public' transport is notoriously expensive because of that very fact. So, now the Greek government have to choose whether to face they fury of fellow eurozone countries, or their own people.

But this €12bn loan is the key to an economic overhaul that could change the social-economic structure of Europe, the eurozone  and the Euro.


Why? 

This is the question that will be asked quite often. Why does this have the potential to change everything in Europe? The reason is that Germany's 'value' - and I put value is quotes because it's not a real value, only an abstract one; €1 in Germany is still €1 in Greece - of the Euro is stronger than that of most other countries in the eurozone. They kept their monetary strength by cutting back instead of requesting bail-outs. As a result, Germany does not have loans that it needs to pay back. So, Germany has managed to float the Euro's value almost completely on it's own back. Without Germany, the Euro would have plummeted in value.

Even Obama has said that Germany's leadership has alone saved the Euro and that it hopes that Germany will lead the rest of the eurozone countries in a suitable economic reform (here's one story, for example). This matters a lot to the USA, whose economy is also suffering. It cannot afford (quite literally) for the Euro to fail. If it does, the US Dollar would most likely be hit with a second recession which would bode really badly for Obama and his 2012 campaign for re-election - but that's another story.  


How?

So, how can the Euro save itself? From what I can tell (so far) is that there are three basic options.

The first option, and the one that most people want - with the exception of the Greek people, is that Greece will accede to the demands of the eurozone and IMF and cut their government spending, sell of parts of itself to privatization to start paying off the debt it owes, and try to get investors to pump money into their country. This is the best solution as it will help balance the drastic difference of value of the Euro. Yes, Germany will have to 'suffer' with a slight devaluation of the Euro, but Greek can be happy with the increase of value on their side. And over a period of two or three years, the overall value would stabilize.


The second option is to drop Greece from the eurozone. This is what many economists believe will happen if Greece does not accept the changes demanded of it. Many economists have already written about why and how it will affect the EU and the Greek nation if that happens (here's one), so I won't really get into it. Suffice to say, that the people who will be hit hardest will be the Greeks themselves. Some think this unfair, but Germany has been floating the value of the Euro on behalf of other nations sacrificing the very things demanded of Greece and they are so far the strongest country in terms of economic power in the eurozone. But if Greece is indeed dropped, the value of the Euro will increase considerably. Some estimates have put the number as high as 1%! That's a lot.
The figure was taken from taking the general value of the change of value of the Euro per person for Greece against the change of value of the Euro per person for Germany and averaging it out. If you view the data, notice the significantly high number of change in Greece's value (change is good) compared with the lower value of change for Germany. If Greece is dropped from the eurozone, the 4% change will then be passed back into Germany, rising the average change of 2% to 3% (or more).

The third option, and the option that most of the eurozone really fears, is that Germany will drop itself from the eurozone and establish their own currency. That would destroy the overall value of the Euro and Germany's economic reforms would propel it into currency powerhouse. This is the option that most affects Europe as a whole, but it's also the option that most Germans would want (psst, don't tell them that). By dropping itself from the EU, they would summarily increase the value of their own currency (which would suck for the tourism industry because no-one would be able to afford the exchange rate - but you would suddenly see a lot of Germans all over the world). If Germany were to drop itself and take on a new form of currency, I estimate that the value would come close to €4 (around £3.5 - as of today). This is why France is trying to 'tie-in' with Germany to try and prevent this from ever happening. But that, again, is a different story. If Germany does decide to leave, though, it will probably take around 2 years for it to completely remove itself from the eurozone, causing a lot of hassle in the process.


Side Note...

Already the Chinese (here is an example) and Indians (here is an example) are going nuts investing everything in Germany as they are trying to establish economic security; and Germany is also investing heavily in China and India. Companies from other nations - USA and UK especially - are seeing this and are outsourcing themselves to these countries in a bid to stay 'in the game'. They also realize that the exchange rate in India and China will be a lot kinder than the exchange rate in Germany - if it were to pull out.


Conclusion?

Greece should accept the changes. This is the best option for everyone as a whole.

If Greece were to go, the people would suffer tremendously for it (economically). Restructuring the entire economy from scratch would also pull out a lot of investors as it will become to 'risky' to invest in the country. Companies would pull out. People would lose their jobs. The probability of sanctions regarding immigration is high, restricting the freedom of movement of Greeks inside the rest of Europe. They would become isolated. This is a very, very bad thing.

If Germany were to go, it would change everything. It would put Germany in the lead as it will become an economic powerhouse. India and China would come in close behind, that would push the rest of the EU and the US out as contenders in the global market.

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