The European Debt Crisis: Ways that Leaving the Euro Could Help Weak Economies

By Julian Knight

Some members of the Eurozone (Portugal, Ireland, Greece, and Spain) are in a vicious circle of recession, government spending cuts, and not being able to persuade international investors to buy their debt. According to many economists, the only way out for these countries is for them to somehow get their economies growing again. That, of course, is easier said than done!

Normally when a country is in recession, the value of its national currency falls. This makes it cheaper for companies within that country to export goods. Companies can sell goods abroad, which boosts economic growth, and helps alleviate the economic problems. This is called currency devaluation.

However, the problem for the weakest members of the Eurozone is that they don’t have a national currency to devalue. Instead they are a member of the Euro — which has some strong economies in it (most notably Germany) — which is keeping its value high. So devaluation isn’t an option for these nations. Unless they leave the Euro and re-adopt their own currency, which will almost certainly fall in value.

Yet some experts think this could help. For example, if Greece were to leave the Eurozone and re-adopt the Drachma as its currency, it would see a radical devaluation. But that would boost Greek exports, and make it cheaper for tourists to visit Greece (tourism is vital to the Greek and other Mediterranean economies).