Kilkis wrote:I don't think "being cheap" is a sufficient condition to encourage investment, Fab. Investors invest with the aim of getting a return on their investment. If Greece went back to the Drachma and that devalued, as it inevitably would, then a foreign investment would need to grow in Drachmas as fast as the Drachma devalues just to stand still in the original currency of the investor. It would have to grow even faster for the investor to get a return. What opportunities do you envisage in Greece that could generate that sort of growth?
Again you are confusing cost with value (we have had this discussion before) and forgetting that currency is only a medium of exchange and has no value of its own.
An example. I “invest” in a new Mercedes car. I pay 40,000 Euros for it. Now a new car depreciates by about 10% when I drive it out of the showroom so on the day I take delivery it is worth 36,000 Euros. The next day Greece reverts to the Drachma and devalues by 20%. Has my car instantly lost 20% of its value? No, its value stays the same (36,000 Euros) but should I chose to sell it my selling price in Drachma, at the new rate of exchange, would increase by 20%. Remember that my selling price is the original cost price (which in Drachma is higher) less the 10% depreciation.
Ditto with your foreign investment. The value of the investment would be the same irrespective of the currency, so it would not need to grow to cover the devaluation.
In general investors look for stability. They don't like uncertainty and Greece with the Drachma would be a very uncertain place. That is why so much money left the country when there was a suggestion that Greece might exit the Euro.
In my opinion, money left the country because of fears that the banks would become insolvent and be unable to meet their obligations. My cash was in the bank for safe keeping, not for investment!
Kilkis wrote:The return to the Drachma and defaulting on debt are closely tied together. If Greece returned to the Drachma it would be forced to default on its debt. The debt is mostly held by foreign entities and is denominated in Euro. Lets say Greece owes €200 billion Euro and changes to the new Drachma at €1 = 1 new Drachma. It now owes 200 billion new Drachma.
If Greece reverted to the Drachma there would be no need to default on the debt. The 200 billion Drachma debt could be repaid almost instantly by printing money. The UK has already printed 375 billion with little effect on the countries inflation although it has reduced the value of the pound on the foreign exchanges.
I don't necessarily think the Euro is a good thing but Greece is in a huge mess because previous governments have put it in a mess. A change of currency won't alter that mess.
Agree totally! (Just to end on a point of agreement)