I keep reading articles in mainstream journals that claim if Greece was kicked out of the monetary union, the Euro's value would decrease.Why is that? Greece currenly has an account deficit of 44 billion dollars. As such, it appears to be responsible for downward pressure on the Euro's value. Wouldn't the removal of deficit nations such as Greece from the monetary union increase the Euro's value? If not, why?
Sphairon: I keep reading articles in mainstream journals that claim if Greece was kicked out of the monetary union, the Euro's value would decrease.Why is that? Greece currenly has an account deficit of 44 billion dollars. As such, it appears to be responsible for downward pressure on the Euro's value. Wouldn't the removal of deficit nations such as Greece from the monetary union increase the Euro's value? If not, why?
Yes, theoretically the euro value would increase because there would be less debt to monetize. But you have to consider also the fact that Greece leaving the euro would create a lot of questions about the viability of the monetary and political union, and that speculation could cause desestabilization on the eurozone putting downward presure on the euro.
I think the pundits are looking at 1.5 steps ahead. If the Greeks default on their loans then you will not have the interest payments to continue the fractional reserve process thus reducing the amount of money in circulation. BUT you will have this very fragile situation where other European banks will begin defaulting on their bonds and what not as they fail to make reserve requirements and fail to pay depositors. The central bank/s will at that point step in to save their friends by creating tons of banking reserves.
This will be similar to what happened in the USA when the holders of mortgage backed securities found themselves holding worthless paper. Eventually these securities were really just accumulated defaulted loans. These defaults removed money from the system. The giant US and Foreign banks suddenly were without the interest and principal payments from these mortgage backed securities and found difficulty paying bond payments which led to failures to make reserves which would lead to defaults on withdraws by depositors. So the central bank and government gave the giant banks tons of money.
Thank you, you have both been very helpful!