Now the strength of the Euro benefited countries like Portugal, Italy, Ireland, Greece, Spain, etc.

Before moving onto the Euro as their currency, they had to borrow money at substantially higher interest rates. But with the Euro as the common currency, they could borrow money at interest rates as good as the rates at which Germany could borrow." "So?" "Well, with low interest rates these countries went on a borrowing spree and since they borrowed much more than their repayment capacity is, they are in a mess. Greece is the smallest of these countries and is in the biggest mess."

The Greek government over the years borrowed a lot of money to finance its fiscal deficit, which is the difference
between what a government earns and what a government spends. A lot of this borrowing was from private investors like German banks to whom the Greek government currently owes Euro 8.6 billion." "Hmmm, now I get what you were initially saying." "So these private creditors of the Greek government have now agreed to take a 50 per cent haircut." "Again haircut?" "What it basically means is that for every 100 Euro owed to them, they have agreed to accept 50 Euro as repayment, primarily in the hope that Greece at least repays 50 per cent of what it owes to them."

Yes, you are right. The hope is that by doing this, Greek debt will come down to manageable proportions. Experts
who have come up with this plan expect Greek debt to come down to around 120 per cent of its gross domestic product (GDP) in 2020, because of this plan. Otherwise it would have ballooned to around 180 per cent of its GDP." "But isn't this a risky thing for Germany?" "Well, if the German banks take a 50 per cent haircut on their outstanding debt of Euro 8.6 billion they lose around Euro 4.3 billion." "Which isn't much for them?" she asked. "Yes. But there is a bigger issue at stake here." "The German banks owe around $45 billion to Greece in total. So a lot of money has been lent to the private sector in Greece. And if the government of a country is defaulting, do you expect the private sector to pay up?" "Yes. Also, Greece is not the only country which owes money to Germany. Spain owes around $238 billion to Germany. Italy, Ireland and Portugal owe $190 billion, $184 billion and $47 billion, respectively." "So these countries might turn around and say why don't we get a haircut on our debt as well? "And then there will be a bigger problem given that these countries are bigger and the money they owe to Germany is considerably larger."

Because there is an economic reason to it. Before Euro became a common currency across Europe, German
exports stood at around $487 billion in 1995. In 1999, the first year of the Euro being used as a currency the exports were at Euro 469 billion. Next year they increased to Euro 548 billion. And now they stand at Euro 1 trillion." "And all this was because of Euro being used as a currency?" "Yes. Using Euro as a common currency took away the cost of dealing with multiple currencies and thus helped Germany expand its exports to its European neighbours big time. Also with a common currency at play, exchange rate fluctuations which play an important part in the export game, no longer mattered and what really mattered was the cost of production," I explained. Since the beginning of the Euro in 1999, Germany has become some 30 per cent more productive than Greece. Very roughly, that means it costs 30 per cent more to produce the same amount of goods in Greece than in Germany. That is why Greece imports $64 billion and exports only $21 billion'." "Fair point." "So the way it works is that German banks lend to other countries in Europe at low interest rates and they, in turn, buy German goods and services which are extremely competitively priced as well as of good quality. This, of course, helps Germany." "And that is why Germany is interested in rescuing these countries or at least showing that it is trying to do something about it?"

Yes, because if these countries in Europe collapse, then German exports will collapse as well. One solution bandied
around is that these countries which are in severe debt to Germany should be asked to stop using the Euro as its currency. But if they stop using the Euro as a currency, then the huge export advantage which Germany has had because of the Euro will also end." "So Germany is jammed in from both sides," she said. "That's the moral of the story?"