You don't buy a BMW. But:

1) You buy a local car because the foreign ones are all too expensive

2) BMW decides to build a plant in your country because it is so much cheaper.

Both of those things help grow your economy, growth leads to a stronger currency, and then you buy a nice new BMW.

Why is it cheaper to build the factory in your country? Instead of paying with a devalued currency, you could simply pay less Euros? Same for buying local vs foreign cars - I just don't see how the currency makes a difference (or the possibility to devalue the currency).

Let's stick to olives: either you get x Euros for a pound of olives, or y Drachmes. In the end, if you want to buy a car, you have to exchange the Drachmes into Euros. You should get exactly x Euros for y Drachmes. Otherwise there would be an opportunity to get infinite olives for free. So it doesn't matter how much you devalue the Drachmes, you'll always get the same amount of Euros per pound of olives.

If Drachmes are devalued, labour in Greece is cheaper than labour in Germany - workers get paid the same number of Drachmes as before devaluation, but they're paid less Euros.

So it is mainly just cheating your citizens. I can't believe economists seriously put this forward as a problem. They should seek to educate the population, not defraud them.

No, it's raising tariffs on imported goods by stealth.

<em>The currency only matters at the border</em>, so if the thing or person under consideration doesn't cross the border, devaluation doesn't matter.

Ah, but the thing is, Greeks then find it massively easier to get out of debt to the other Euro nations.

Inflation has been called "austerity done right".

That is kind of a "milk maid" equation, as we call it in Germany. If the Greeks wouldn't have the Euro, perhaps nobody would have lent them money to begin with. So at least if you advocate countries having their own currencies, you should be aware of that aspect. It's not as if problems (debts) just evaporate with control over the currency. You would have other problems instead.

Yes, but it's much better to have a problem you can actually solve by taking responsibility yourself, rather than a problem whose solution relies on someone else being nice to you against their own interest (Southern Europe being on the same currency as Germany).

But maybe those states would have been bankrupt much sooner, not being able to borrow without the Euro. That is what I mean - no problem would have been solved by not being on the Euro.

Ok, let's talk two scenarios. First one: real world. We know how this one turns out.

Second one: Greece was never allowed into the Euro and off the Drachma. So what happens? Well, the lack of productivity in the Greek economy means the drachma stays and goes continually down in relation to the Euro, which we'll presume is the dominant currency-zone Greece wants to import from. The result is that Greece is forced to take responsibility for its own behavior much earlier-on, and without damaging impact on anyone else. At some point, the Greeks, in this scenario, simply cannot import much anything from Northern Europe, but their land, labor and capital become very cheap for external investors. Then, if the Greeks are at all smart, they get exploited for a little while to make foreign capital spend itself improving their productivity, until they can either become self-sufficient or balance their trade via cheap exports.

As Greek productivity improves, the drachma becomes more expensive, allowing the Greeks to then import more on the strength of their own economy rather than by borrowing from someone else.

It's simply a known fact in economics that separate macroeconomic policies and environments demand separate currencies, or else you get a financial crisis of some sort.

I think it is a psychological issue. If salaries get cut by 30% across the country, people go to the streets. If you devalue their currency, most people don't even realize it and just accept that the prices for certain imported goods went up.

I can understand the psychological aspects, but I can't accept that economists see that as a serious issue. It is like "oh dear, we can not cheat our citizens anymore", like saying "governments need the ability to defraud the population". They should instead seek to educate the population.

It's not just that, while devaluation alters import prices local prices like rent and service costs don't fluctuate. So a 30% devaluation doesn't make people 30% poorer.

Of course it would: in your example, the landlords would be poorer because they would collect less rent. Likewise for service providers. Perhaps you could argue for public services, but for those the government could just lower the fees instead of devaluing the currency.

But thanks to your example I see it has more subtleties: it is also a question who to take the money from. Making landlords poorer might be an easy sell to the majority of the population - if the population would have any idea of what is going on, which I doubt.

Services might just go away if they make less money.

No, landlords would NOT be poorer, they're taking in exactly the same as before devaluation. Devaluation directly effects ONLY imports (more expensive) and exports (cheaper): it effects the local economy only based on how much it depends on each.

That is simply false. Think it through.

I am being paid a number of arbitrary denominators of value per time period.

Government declares that the arbitrary denominators of value now buy half the number of a different arbitrary denominators of value they did previously.

Because I am a locovore Luddite (for the sake of the argument), everything I buy is made in the country, with materials produced in the country.

How does the devaluation effect me?

Devaluing your currency makes foreign products more expensive relative to yours and makes your products cheaper relative to foreign ones. That means that it is less attractive to export goods to your country and more attractive to import from your country.

That does not mean that devaluation is a sinecure; for example, if you heavily depend on imported goods, it will drive prices for those goods up. But it can help correct trade and current account imbalances.

Also, devaluation is, more often than not, something that happens simply due to trading and market pressure and not because of government action. If a country keeps having a trade surplus, then its currency will automatically appreciate, unless there are countervailing forces.

Let's say you're Greece and you're a trillion Drachmes in debt. You can't pay the interest anymore, your deficit is too high. Greece uses INFLATION, it's super effective! Prices double, but wages double also. Tax income doubles. What stays the same is the debt, and suddenly Greece can afford to pay its lenders. National crisis averted. Only the lenders are screwed, and those who had their savings in Drachmes. That's also the reason why it's very popular to have savings accounts in "hard" currency in these countries.

That's how it has been for decades, but now with the Euro that's not possible anymore, leading to the Euro crisis.

>How does devaluing Drachme help you afford the car It doesn't. On the contrary, it helps you export your home made Pallas Athene car.

Suppose it costs you 25000 GRD to build that car and that's 12500 € at 1 € = 2 GRD. You can sell it internationally for 15000 € for a profit of 2500 €.

Now the GRD plunges to 1 € = 4 GRD. Your costs stay at 25000 GRD but that is now only 6250 €. You either can continue to sell internationally for 15000 € and earn an extra 6250 € profit or reduce the price and sell a lot more thereby also raking in more cash.

Since you probably have to procure parts from abroad, the extra profit will be a lot less, but still it helps you _sell_.

Who pays the bill? Of course the general population if it continues to buy imported goods, because the price of those goes up. If only a part of the gen pop switches to buying domestic goods - hey even better for the domestic producers. Apart from making more on the international market, they gain on the domestic market.