How the Greeks Could Destroy a Currency

Germany's Spiegel Online reported Friday that insiders in the Greek government leaked the news that Athens was considering leaving the Euro. Greece has been wracked with debt problems for years, and some economists have called for the country to abandon the Euro. Last March, British economists at the Centre for Economics and Business Research told Greek ministers that without leaving the Euro and devaluing their own currency, they will be unable to escape the nation's debt trap. In March of 2010, noted economist and Nobel Laureate Paul Krugman predicted that Greece would have no choice but to abandon the Euro, as boosting exports through relative currency weakness would be the only way to expand the Greek economy. Sovereign nations with their own currency can finance their deficits through central bank monetary expansion—a policy the U.S. has been following since the economic downturn. However, Greece cannot adopt such a policy as the decision to expand or contract the money supply is controlled by the European Central Bank. Until now, the Greek government has not considered such a shift, instead choosing to accept a series of bailout packages and fiscal austerity measures. The failure of these measures is evidenced in the series of protests that have rocked the Mediterranean nation. In a recent statement, a Greek government official denied Spiegel's report. The Euro was down Friday on the news, though it has subsequently rallied on EU officials strong denial of the rumor. Traders wishing to play Euro weakness should consider a short Euro ETF such as ProShares UltraShort Euro EUO. Should Greece decide to the exit the Euro, it could prove disastrous for the currency. While Greece's debt problems may be bearish for the Euro, for Greece to exit would set a dangerous precedent. Other nations in the Eurozone facing debt problems—most notably Ireland, Spain, and Portugal—could decide to abandon the currency as well, which could be the beginning of the end for the pan-European currency.