There were both economic and political reasons why the euro was developed as a project and both economic and political reasons why countries such as Greece should have stayed out. When a country suffers from an adverse economic shock, living standards must decline. Greece has suffered from a huge economic shock and one that has been exacerbated by its membership of the single currency. If a country has a floating exchange rate, the currency of the state suffering from the shock will normally find that it falls in value. It is this that facilitates the reduction in living standards. A country that is in a fixed exchange-rate regime cannot easily adjust its living standards, unless there is a huge fall in real wages in the country concerned. When inflation is close to zero, this means a fall in nominal wages too.
This is the backdrop to the problems in Greece. If, as a young economist, one was to paint a picture of all the problems that would make economic adjustment difficult, one could not do better than to look to Greece – a huge public sector; exceptionally rigid working practices; a dysfunctional tax system; minimum wages. The list is almost endless. To cap it all, the Greek government also has an unsustainable debt burden. This problem is exacerbated by the fall in living stan