Lastly, it will boost the tourist industry as it is less expensive to travel to Greece. This helps tocreate job opportunities and reduce unemployment.Limitations to Devaluation of Exchange RateA devaluation would cause inflation as imports prices increase. As a result, it will increase thecosts of living and reduce the standard of living. Devaluation also involves leaving the Euro.Therefore, there is a risk of substantial capital loss as Greek savers want to protect the value oftheir savings by moving into Euro bank accounts. This capital loss would cause banks to run outof liquidity (cash).ConclusionIn order to reduce fiscal deficits, the government is advised to use a combination of policies. Akey factor is the timing of the implementation of policies. If Greece is already in recession, it ismuch more difficult to reduce the deficit because fiscal consolidation tends to worsen theeconomic situation leading to lower tax revenues. The best way to reduce government budgetdeficit is to aim for positive economic growth, but in the long-term evaluate governmentspending commitments and reduce spending to sustainable levels. In addition, implementing adevaluation of exchange rate will boost the demand of Greece products and lead to an economicrecovery.
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