If Greece had its own currency there would be certain compensations against economic downturn. One example of this relates to the international demand for Greek goods. If the output of the Greek economy slows down one way to get out of recession is to increase the level of external demand. If Greece was able to devalue the currency by creating an inflationary gap through seniorage it would increase the demand and investment from foreign entities due to the low costs in real terms. Also the labour force would become more desirable as the willingness to work and for less money is created through economic hardship. As the Euro is based on the cumulative value of the monetary units across the Eurozone the Greek relationship with economic forces is altered. In short the Greek government cannot use the above technique to entice economic growth due to the single European currency and the objective of maintaining currency value. There is a deeper dimension however. As repayments of loans relate to the purchasing value of the currency any inflationary of deflationary gap will have an effect on the relationship with the investor. Due to Greece being highly geared and having to pay enormous amounts of debt back with interest this relationship becomes strangulated. If there is deflation the relative repayments become higher and could cause economic damage. The converse is true also if inflation occurs the repayment is diminished in real terms. This adds greater emphasis to the point raised above in relation to the limitations of monetary control as a result of being in the Euro. However, even if the Greek government did not increase the money supply there would be a natural compensation if the economy deteriorated. If the output declined and the money supply stayed at the same level it would create a supply shock resulting in an inflationary gap. This inflationary gap would reduce the repayment cost of the debt in real terms the situation is the same. As the Euro is based on the overall Eurozone stability this natural compensation is unlikely to occur due to the reduction in output not being directly offset by a domestic currency. Creating an environment where the Greek repayment costs could increase in real terms. What makes the situation perhaps more serious is that rather than this natural inflationary compensation occurring due to the relationship with Euro it could make it worse. If the Euro moves in wrong direction and increases value there would be a deflationary gap, which would make the repayments even more expensive pushing Greeceâs economy into an even worse position. Although this may be unlikely, there is a possibility of this and even if it was only for a short period could do irreversible damage. Any comments.