Krugman's Clear Primer on Greece

Paul Krugman's column from yesterday nicely explains the Greek crisis in a manner comprehensible even for someone who studied environmental policy and geography. The key is that being in the Eurozone, Greece cannot devalue its currency, which would make its products cheaper in other countries and other countries' products more expensive in Greece, thus improving its trade balance.

But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.

He also had some interesting things to say about how the crisis hit them. Entering the Eurozone had opened the PIIGS (Portugal, Italy, Ireland, Greece, Spain) to lots of investment because of confidence in the euro, but the financial crisis caused it to "dry up" as he puts it. This is what drove these countries' government into such dire fiscal straits. Spain was even experiencing a budget surplus prior to the crisis. Perhaps for countries who don't have a lot of financial capital themselves it's not the best idea to completely liberalize investment in addition to trade.