Question: The greek financial crisis?

So from watching the news from several sources, people have been talking about how Greece leaving the Euro will be catastrophic for Europe and Greece its self. I understand that Greece going back to the original currency would be better in the long run. I dont understand how Greece leaving the Euro would be catastrophic to the EU. I thought Greece leaving the Euro would be one less problem for the EU but bad for Greece. Can somebody explain to me why Greece leaving the Euro would be bad for the EU currency?

Answer:

I don't know what the media pundits say about this, but here's my take:

And let's be clear; Greece is not potentially leaving the EU. It's potentially leaving the Eurozone, which is a subset of the European Monetary Union (EMU) that uses the Euro as its official currency, which is itself (the EMU, that is) a subset of countries within the EU that works towards greater monetary and fiscal integration.

Greece leaving the Eurozone is bad for other members of the Eurozone (both present and future) because it's a signal to the market that the Euro as a currency failed in its attempt to reduce the risk of investing in European sovereign debt.

Let me explain. Let's say I have $100 to invest, and I know I want to invest it in currencies. Of course there are lots of different currencies all over the world to choose from. How do I choose? Well, since I'd like to earn interest on my investment, I don't want to simply buy hard currency. I'd much rather buy sovereign debt (like Treasury bills), denominated in my preferred currency. That way I get the currency exposure I want, plus I get interest! Good deal so far.

But I don't want to invest in the debt of a country that's not going to repay its bills. What would make me less worried that a country won't pay its bills? Many countries have defaulted on their debts in the past. Maybe if a group of countries got together and made an implicit promise to back each other up? If one country has a problem meeting its obligations, the other countries would come to its rescue so, I, as an investor, wouldn't have to worry as much about losing my principle. Still a good deal so far.

So I invest my $100 in the Euro by buying Greek debt. It's obviously a great deal for Greece, because demand for Greek debt goes through the roof, dramatically lowering interest rates, both for the government and for Greek citizens. But when Greece can't repay its debts, I'm very worried about losing my investment. I look to other members of the Eurozone to keep default from happening because, after all, I relied on an implied promise that they would do so.

If Greece leaves the Eurozone, then the implied promise is expressly broken. I lose my investment.

How is this a big deal for the remaining Eurozone countries? Do you think that I, as an investor, will ever want to take a similar risk again by investing my money in other Eurozone countries? Now I would know that the whole concept of a monetary union is a sham because it wouldn't actually reduce the risks of investing. So the whole point of the Euro would be defeated. Interest rates would rise because demand for Euro-denominated debt would decrease, which would raise costs for Eurozone government and citizens.

I hope that explains it well enough.

Hold on..