Tulips

But would a devalued currency improve a country's economy overall?

It's impossible to say, of course, but a devalued currency would lead to more expensive imports - of energy, for example. And imagine having to pay interest in Euros on your loans, with a devalued Drachme.

Ackislander

Both devaluation and inflation are Bad Things, which is why central banks spend so much time trying to manage them into something resembling equilibrium.

Greece devalues its currency in relation to the dollar. Oh, boy, great for American tourists!

Greece can't afford John Deere tractors any more. Oops, my John Deere stock goes down, and I can't afford to go to Greece.

Greece really wants those tractors, so they sell bonds to finance them. Who wants bonds from a country like Greece? Only buyers who demand a high interest rate. So Greece raises taxes to pay the high interest rates. Hotels raise prices to pay taxes. Now it costs more to go to Greece. This is a vicious cycle. It is a lot more complicated than this, but it is early in then morning.

Sue_xx_yy

I have been following this with some interest as Paul Krugman stoutly maintains that Greece would be better off if it had its own currency. What I have always understood him to mean, is that Greece could then try to weaken its currency if it so chose. (I say, 'try' because a lot of factors apparently come into whether a currency ends up cheaper against another currency.)

As others have said though, Greece must import as well as export, and their debt is a cost that would be denominated in possibly stronger currency. If your revenues don't increase more than your costs, you are no better off than before.

Greece was given a mandate to reduce its costs by cutting government services. Unfortunately laid-off people buy fewer things - i.e. they don't contribute as much to revenue. If one does not decrease costs more than one decreases revenue, one is no better off than before. Meanwhile if tourists insist on air conditioning, which requires energy, and if one has no local energy source, then it may not be so easy to decrease prices.

I dunno, but my own theory is that the earth can support only so many people, and certainly at a given level of lifestyle. But what do I know, PK is a Nobel-prize-winning economist, and I can barely balance a cheque book.

vincenzo32951

So I guess we can all agree on one thing: It's complicated.

Cowboy1968

Most people forget that the pre-crisis Greece already had been a somewhat fragile economy with a byzantine public sector. In addition, one of their major assets, agriculture was geared more towards low per item revenues from cheap bulk sales. Or in more folksy terms: The profit from Greek olives is mostly made by Italian refineries.
As sue wrote, when the byzatine public sector in Greece got downsized (euphemism for throwing tens of thousands people into poverty), domestic demand got killed.
The guilt of the banking sector is another big story. Probably one the finest examples of internalising profits and socializing losses.

The positive effects from a devalued currency can come in effect when the negative impact from importing resources, raw products and pre-products like crude oil, steel, produce etc. get outweighed by the higher end price of the refined pret-a-purchase product. So, within certain margins, an export-driven economy that is mostly based on refining products (or selling raw products) can benefit from a devalued currency, especially when operating in markets with regular to high price elasticity on the demand side.

If the economy has little or no natural resources and is based on refining products that compete in a market with lesser price elasticity on the demand side, it can be geared more towards a strong currency. As this will make the imports of, say, crude oil and steel considerably cheaper while the demand side stays somewhat stable.

While the US and other economies have more sectors like in the former example, economies like Germany operate mostly in the latter. That's also why blanked statements saying that a devalued currency is good for exports are not always true.

sandralist

And I guess we can't agree that to some people it's too confusing, nor do they realize how confused they are about it. (Well, at least some do.)

If Greece reverts to the drachma, it will not be more expensive for it to pay interest on its loans in drachma. It will be cheaper. In fact, the point of devaluation is to default on your loads. Devaluation is not a bad thing. (Ask George Osborne.)

It is always true throughout the world that producers of exported goods can end up paying more for those same goods at home than those buying them as imports in other countries. It it as aspect of the law of supply and demand, plus other factors of efficiencies and taxation and pricing strategies, yada yada. It may be more profitable for Zara to export its brand to Belgium and sell more of them at a lower price than at the price it sells the same item within the Spanish market. (Just an example. I don't know Zara's market strategy ). One of the benefits of having a common currency is that if you are Belgian you don't actually have to go to Spain to live like royalty consuming Spanish goods. This does not mean that quality is never a factor, or that every Italian wine sold in Germany is cheaper to buy in Germany than it is to buy in Italy.

But if anybody is wondering why the countries of the eurozone keep the euro despite all the harm to many people it is because it is a trading zone run for the benefit of exporters. It doesn't matter to exporters if the cost of living in their own countries is increasingly unaffordable or if people are out of work and have no money to buy what their compatriots are producing. What matters to exporters is whether people in other countries have the money to buy what they are producing. The Italian wine industry would collapse without exports. So it is not only pricing strategies that keep the cost of Italian wine lower in many parts of Germany than what you will find in many parts of Italy (same wine), but the entire Italian economy and political strategy will be geared to maintaining a strong consumer class in Germany, with robust employment -- even if Italians are out of work or suffering other hits to their standard of living.

sandralist

(Cowboy1968 and I were posting at the same time and my post was not in response to his or hers. But the point about Greek olives for export underscores my point. I would also add that the biggest benefit to Greece of devaluation in the form of reverting to the drachma would be to free itself of the obligation to pay off its euro loans in euros.)

sandralist

By the way, to get back to the OP's question, to the extent that Greece has enjoyed some measure of economic recovery, it has been due to an unexpected rise in Greek tourism, which was partly due to "internal devalution" in Greece (slashing prices while keeping the euro) but also due to tourists avoiding Turkey and other sunny areas of the Med and Middle East because of political instability.

sandralist

Sue_xx_yy:

Robert Mundell, who is often called "the father of the euro" also won the Nobel Prize in economics. Krugman was in fact wrong in predicting and arguing that the only way Greece would have economic recovery was to leave the euro so it could increase tourism. Krugman's unstated arguments -- which is that it would have been more ethical to allow Greece than path than the alternative path which has now boosted tourism -- is an argument I can buy, but facts proved Krugman's technical argument wrong.

Nobel prizes are meaningless, and really don't confer truth on anything. Contrary to a very, very popular and enduring belief on Fodor's, something isn't automatically wrong or right because of who said it. It is either right or wrong or confused because of what was said, independent of who said. Therefore, it doesn't matter who said "the Euro is not equal everywhere" or "a dollar is a dollar all over the country." These are -- ahem -- confused and confusing statements and the person who notices that isn't important.

travelgourmet

There is certainly a lot of validity to the notion that the weaker economies should be able to devalue. The euro largely allows the strong countries (Germany, in particular) to artificially weaken their own currency and artificially inflate that of Spain, etal. The outcome has been an exportation of inflation from Germany and making many of the Med countries hopelessly uncompetitive, at least for the near to mid term.

Ackislander

" I would also add that the biggest benefit to Greece of devaluation in the form of reverting to the drachma would be to free itself of the obligation to pay off its euro loans in euros.)"

Umm, no. You borrow euros, you pay back euros. You borrow renminbi, you pay back renminbi. Unless you can getyour debtholders to take drachma, which they might do at a hugely discounted rate if it is better than getting nothing. What is the net present value of a drachma in ten years? But whatever the Greeks are buying abroad is going to be denominated in a hard currency -- USD, sterling, euros, etc, which will cost more in local currency, lots more after a default.

sandralist

Ackislander

If the Greeks had reverted to the drachma they would pay off their creditors in drachma. Don't believe the awful me. You can look it up.

http://www.businessweek.com/articles...lly-looks-like

travelgourmet:

The notion of a single currency is that it is single. California is not allowed to revert to another currency to make its exports more attractive.

The OP asked a question to which a lot of these responses are unresponsive whether what people are saying regarding the euro or European economies makes sense or not. It just is beside the point. Unless Greece or Spain or Portugal or Ireland actually left the euro and used another currency then there is actually no way of knowing what impact it would have on tourism and tourist purchasing power.

But we all know a few things:

Greece did not leave the euro and yet it became more attractive to tourists.

Posters here are saying that Spain and Portugal are bargains whether you are spending euros or dollars.

Neither Switzerland or Norway uses the euro and yet most tourists spending dollars or euros find them very expensive countries to visit as tourists.

Leaving aside the question of what is good for the tourist the other question is whether Greece would benefit from leaving the euro. That is a huge political argument that doesn't have a purely technical answer but even just narrowing it down to whether Greek tourism benefits or is hurt by using the euro it is my guess that the benefits to the Greek tourist industry outweigh -- thus far -- the disadvantages. Which seems to be the opinons of Greeks (thus far) which is why a majority thus far continues to support keeping the euro (for many other reasons as well).

chartley

While we are discussing the Greek economy, I understand that Greece is suffering greatly because of the embargo against Russia. Greece apparently exports a large amount of horticultural produce to Russia and cannot currently do so. The produce is perishable, and cannot be diverted to northern European markets because they already have arrangements to import from countries like Spain and Italy. So there are truckloads of rotting peaches all over the Balkans.

On the subject of the merits of devaluing one's currency, it does appear that are seldom any benefits to revaluing one's currency upwards. In fact, there is no simple word for that action. In an international market economy, currency values are generally set by currency traders. Is there a way of prompting a devaluation of your currency, except by reducing interest rates in your country? This is very difficult at present, as interest rates are already at minimal levels. In fact, would Greece not have to raise interest rates (and so hamstring its economy) to stop a drachma going through the floor?

travelgourmet

<I>Unless Greece or Spain or Portugal or Ireland actually left the euro and used another currency then there is actually no way of knowing what impact it would have on tourism and tourist purchasing power. </I>

We can make educated guesses as to what would happen. Pretty much any economist would tell you that Spain and Greece would be cheaper for a tourist if they left the euro. More importantly, they would likely be cheaper for residents.

<I>Posters here are saying that Spain and Portugal are bargains whether you are spending euros or dollars</I>

Bargains compared to what?

<I>Greece did not leave the euro and yet it became more attractive to tourists. </I>

Prices are a function of supply and demand. It could simply be that Greece has become less attractive to tourists (concerns over instability, weak European economic situation, etc.), resulting in lower prices. Greeks did not lower prices for the heck of it.

MyriamC

Bargains compared to their home countries.
Portugal/Spain vs. Belgium/Netherlands/Germany for instance. That is what I personally experience.

adrienne

Portugal is definitely a bargain compared to my home area and compared to Italy or France. I'm speaking as a tourist thus focused on hotels, restaurant meals, transportation, and sightseeing.

As an example, I can't get a hotel room for $25 to $35 at home. Hotels in my area, during the week, cost about $250/night (less on the weekends, of course). The more expensive hotels (Marriott Courtyard types) are nicer with more amenities but I don't have the option to stay in a less expensive hotel as they don't exist.

Restaurant meals, with a half bottle of wine, comparable to what I ate in Portugal would be $50 rather than $12 to $15.

travelgourmet

<I>Bargains compared to their home countries.
Portugal/Spain vs. Belgium/Netherlands/Germany for instance. That is what I personally experience.</I>

Okay then. On a like-for-like basis I do not find Spain (not ultra-budget travel) cheaper than staying in much of the US. Personally, I found Germany to be almost as cheap as Spain. I can't comment on Portugal, though I suspect it is a bit cheaper than Spain.

MyriamC

@travelgourmet
Depends of course where you are in Spain. We were in Andalucia this June and we spent about half on lunches and diners of what we spent in Barcelona the month before. Germany is indeed cheaper than Belgium and Netherlands when we talk about eating out.
I have never been in the US, so I can't make that comparison.

hetismij2

Chartley, Greece is not the only country suffering from the embargo. Plenty of Dutch fruit vegetable and flower producers are suffering too, as are Spanish, French and Portuguese.

Greece should not have joined the euro in the first place, since it clearly didn't meet the requirements to do so. Having cheated it's way in, and been bailed out by the rest of us, to the detriment of our own economies, it has clearly benefitted from an increase in tourism.
The Russian embargo will be hitting that too though.

Whether or not it is better for tourists visiting is by the by, and a rather selfish pov.
Having opened this can of worms again Robincal hasn't been back to respond.

Michael

<i>More importantly, they would likely be cheaper for residents. </i>

That is questionable. Someone has to pay for the fact that goods are cheaper either for export or for the foreign visitor. Otherwise there would be no advantage in terms of the nation's economic health in switching to a local currency. When politicians and economists suggest that belt tightening is in order, I am quite certain that it rarely if ever applies to them.