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How the euro caused the Greek crisis

Greece is in a state of economic and financial crisis that's dominated global headlines this week, but the real roots of the crisis lie over a decade ago in the misguided idea of uniting a very diverse group of European countries into a single currency:

Control over the supply of currency is one of the most important tools of economic stabilization that any country has. If used poorly, it can wreak devastation. But if used correctly, it can be a great cure for unemployment.

The problem is that Europe's various countries have very different economies and very different economic situations. It's impossible to make monetary policy that's equally appropriate for Greece and Germany, and since Germany is larger and more important, the European Central Bank winds up doing what's right for Germany. That's a sensible enough decision under the circumstances, but it means that Greece is perpetually stuck with an inappropriate monetary policy and disastrous consequences for the Greek economy.

In theory, this could be fixed with a much deeper form of economic integration that would continually send vast sums of money from richer European countries to poorer ones, like this:

But for understandable reasons, the citizens of richer countries don't like that idea.

Consequently, Europe has ended up stuck with an unworkable economic system. The single currency is a valuable and important sign of Europe's political commitment to peace, integration, and unity, but it makes managing unemployment and inflation essentially impossible.

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