By now, you all should have heard about this Greek debt crisis. I haven’t blogged about this topic for long, only keep on warning investors when they became complacent that the situation was always the same, nothing new.
In today’s Straits Times, it was discussed “Why Greek debt crisis matters to investors here“. While it seems that “politicians, regulators and bankers alike in Europe all wanting to avoid Greek default at all costs”, perhaps it is good time to review the history of Euro Currency to understand why Greece, whose economy is only half the size of Thailand’s, has such a big impact.
The euro currency was created in 1999. Despite a clear trend toward greater exchange-rate flexibility during the second half of the 20th century, the countries of Western Europe chose to go against the global consensus, forming the largest network of fixed exchange rates since the gold standard. Seventeen countries with a combined population of more than 325 million fixed their exchange rates to one another using one common currency managed by a single central bank, the European Central Bank (ECB).
In Legg Mason Asset Management‘s view, Europe’s monetary union fails to meet most of the necessary properties for an optimum currency union – an ideal geographical range for a single currency arrived at by a group of economists. The European Central Bank’s one-size-fits-all monetary policy is ill-equipped to address asymmetries across member countries’ divergent business cycles. As a result, business cycle stability must be subordinated in favour of exchange-rate stability, and the euro has been spread across too wide a geographic domain.