Currency Parity and Competitiveness: The Case of Greece

Currency Parity and Competitiveness: The Case of Greece

Carlos Encinas-Ferrer (Universidad del Valle de Atemajac (UNIVA), Campus León, Mexico)
DOI: 10.4018/978-1-5225-0843-4.ch010


The international competitiveness of a country is the ability of its domestic production to participate commercially in foreign markets. There are many elements that influence in the long run this competitive ability, some of macroeconomic nature as low inflation and real exchange rate, others of microeconomic character such as the productivity of its offer and its labor and wage level in relation to their Business partners. The problems that monetary parity has on the competitiveness of a country's productive plant seemed to be overcome in Europe with the establishment of the euro as the common currency in many of its countries, the so called Eurozone. The first years seemed to confirm this. However, the global crisis in 2008, as a prelude to that the Eurozone would live in 2011, put on the table for discussion the weak economic theory of currency areas in which it was based and, therefore, the irresponsibility with which it was established.
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The crisis has also shown us that we lacked a general theory of currency areas and, therefore, of elements that could allow us to determine with certainty its characteristics as optimal or non-optimal. Product of this ignorance, the Treaty of Maastricht established a series of convergence requirements that were limited to only a few economic variables and were thought to be sufficient to give stability to the euro currency area. They were not and led to a financial crisis of such magnitude supposed impossible twelve years before (Encinas-Ferrer, 2014a: 57).

Today we know that a currency area constituted by a group of countries in which circulates a single currency, as is the case of the Eurozone, may be optimal or not depending on whether it has:

  • 1.

    Free labor mobility (Mundell);

  • 2.

    With a high volume of intra-regional trade the single currency reduces transaction costs (McKinnon);

  • 3.

    Fiscal integration (Kenen); and

  • 4.

    Banking union (Tugores).

The lack of a banking union implies a central bank that is not in full, as the European Central Bank (ECB), as it lacks its function of lender of last resort.

It is clear from the above that in the euro area the last two requirements, fiscal integration and monetary union, were not given and their absences caused the financial crisis worsened in 2011.

In any monetary area inflation differentials between the regions that compose them occur (Encinas Ferrer, 2014b). However fiscal integration and banking union, together with a central bank that assumes its role as lender of last resort, in addition to the first two requirements of free mobility of labor and a high volume of intra trade zone, allow that inflation does not accumulate.

In a non-optimal currency area which has a common currency, those levers are not acting and inflation differentials accumulate indefinitely until an internal depreciation occurs by falling wages and declining real consumption, returns the country competitiveness again with a huge sacrifice for the population.

In this study we analyzed the evolution of the euro exchange rate from the perspective of Greek foreign trade and its impact on the balance of payments. We see that the single currency became a real straitjacket for this country being unable to devalue the exchange rate to adjust its real economy.


The Competitiveness Seen From The Macroeconomics

The first and broader view of the competitiveness of a country is given to us by its trade figures. What I am referring to? The results of the trade balance. A country with a permanent trade deficit immediately shows lack of competitiveness.

In the period 2000-2014, Greece accumulated a trade deficit of $ 520.625 million dollars which has involved a similar movement in the capital account so it should not surprise us a growing and high international indebtedness. 52,5% of the deficit, $ 273.400 million, was with the European Union countries and 43%, $ 222.582 million with 10 countries of the euro zone, Germany in the lead.

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