The euro, while a bold idea, is being tested at the moment. Whilst British exposure to Greek debt is more limited, there are a number of countries where their banks are more disposed to the possibility of Greek default.
Default on the Greek debts has now been put off until possibly 2014; Greece's debt repayments having been settled recently. In effect the euro is a currency equipped for the German economy. Any time spent in Greece would lead you to realise the disparity between any Greek goods you buy, and the German prices you have to pay for them. It is collective indebtedness that has got the Euro zone into the trouble it is.
The Greeks are, despite the allegations to the contrary, well motivated individuals with a considerable proportion of self-employment. It is government indebtedness to pay public sector employees that is causing the collective problems for the Euro zone. In turn rather than the public having to bail out these more marginal countries, it should be the banks that are responsible for the indebtedness that they face. Moral hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to that risk. The issue of moral hazard suggests that bank exposure should have been more equipped with this moral hazard aspect.
These banks while being well meaning, have drawn these countries into the trouble they face. Throughout the world we now have a global debt crisis where the very security of banking depends on this so called lender of the last resort. A lender of last resort is an institution willing to extend credit when no one else will. Within the EU a number of separate states have combined together to enjoy a common currency known as the Euro. The main bank or the main lender of last resort here is the European Central bank, despite their attempts to act as a collective economic entity; effectively the finance comes from Germany and France. For the German and French voters this causes political problems at the moment. A number of countries within the EU, all of which enjoy using the Euro, are experiencing problems relating to their collective debt crisis. These countries, Britain being among them, are selling bonds on the open market to finance their debt.
The question then arises as to who is buying this debt. Japan and China are among countries that are helping the western economies deal with their current situation. Like Britain, Greece has a problem of indebtedness that is requiring wider cuts across the economy. By making these cuts, the Greek economy like Britain, is heading into further unemployment. Greater joblessness gives an entitlement to unemployment benefit in both countries; but this leads to further indebtedness in return. In Britain the government are seeking to deal with the debt that the country is in. In Greece by comparison, the issue is adding to the countries collective indebtedness which exacerbates the problem the country faces.
Britain however, now has an essentially right wing dominated coalition government. Greece by comparison has a more political tradition that extends to both left and right. More recently they have a coalition government that embraces the aspirations of both sides. The British and the Greeks have different attitudes towards being in debt at government level. The coalition government in Britain is anxious to stress at every opportunity the way the country is currently seeking to reduce its debts and control our interest rates. There is a small distinction here that is important. Britain is not a member country of the Euro zone whereas Greece is. On my recent trips to Greece I was struck by how expensive everything had seemed to be. Hotel rooms and food was even on a British salary, quite prohibitively expensive; and this represents the problem as to why, when a situation is good, does a country get into considerable debt as it seeks to expand at a rapid pace.
As a member of the eurozone Greece has become a much richer country but it is however, regarded as the poor man of Europe. This re-introduces the classic economic problem of wants and scarcity. In the early 1980s Greece seemed to me to be like a paradise. At that stage the Greek people had just joined the European Union. Clearly they had many wants and as an economy they were consistently constrained by the notion of scarcity. The EU bought many benefits for Greece, not least in investment in roads and transport infra-structure. Although to me Greece seemed fine, it was a country demonstrating the economic problem of wants and scarcity. The Greek people had many demands that the economy couldn't necessarily supply. By entering the euro it was trying to provide greater resources for its population. In this respect the country was successful. But gradually over time as Europe drew them into the Euro zone, the country then became drawn into trying to supply Greek goods at German prices. In this respect perhaps it was less successful. This is unfortunate but it does demonstrate very clearly the classic economic problem written large. The country wanted to grow, which it has done, and hosted in 2004 the Olympic Games, but this has lead to massive deficits that it is currently trying to come to terms with.
The euro is a currency that was only introduced in monetary form from 2002, but already after just ten years, the return to the Drachma and other domestic currencies would be almost impossible to achieve.