Watching the battle play out between Greece and Europe's financial leadership, observers in the United States might wonder how it is Greece got itself into this mess. Could such a thing ever happen here?... No, it could not. The reason lies in the different structure of the United States and the European Union, and has led to much confusion in the United States, as politicians have warned that if this or that policy isn't enacted, America could become “Greece on steroids.” The key difference is that the United States has its own central bank -- the most powerful one in the world. Greece, meanwhile, does not. And while the states of the United States are genuinely united -- a common banking system, common federal budget and common political system -- the eurozone is a federation of countries with a common currency that, in the face of crisis, must largely fend for themselves.
When countries’ economies slow down, they have two sets of tools at their disposal: monetary policy (adjustment of the money supply) and fiscal policy (adjustment of government expenditures). Central banks fill the demand gap of a recession by printing currency, and governments do it by spending more than they save... A broad array of economists believe this fiscal austerity has devastated Greece’s economy. In the years since Greece implemented its creditors’ austerity policies, its economy has shrunk by almost one-third, and adult unemployment remains above 25 percent.
Greece’s budget tightening would not be as much of a drag on its economy if it had monetary stimulus at its disposal. By devaluing currency, a country can boost its exports and domestic consumer demand. Iceland, for example, was able to recover economically despite a massive fiscal contraction because it had its own currency and could print as much of it as it wanted.
But Greece is on the euro, and the European Central Bank, which controls the euro, has not afforded Greece anywhere near enough stimulus. During much of the recent economic recovery period, the ECB’s cautious monetary policies reflected the inflation concerns of Germany.
Unlike its counterparts in the United States and Great Britain, the ECB raised interest rates twice in 2011, which is believed to have contributed to the continent’s double-dip recession -- and hit struggling economies like Greece’s especially hard.