Greek Debt Crisis
Greece’s debt crisis has brought the future of the euro into sharp focus over the past few days, to the extent that some analysts are questioning whether the eurozone can survive in its current state.
What’s happened?
The global financial crisis hit Greece hard. Years of extravagant spending – including a particularly-expensive Olympic Games in 2004 – and a failure to rein in its debt meant that the country was ill-prepared to cope with the pressures of the worldwide economic downturn.
In 2010, government debt is widely expected to be 120% of GDP. This is twice as much as EU rules allow. If the other eurozone countries simply allowed Greece to default on its debts – or even let it split from the single currency altogether – other countries with worryingly-high public deficits, like Spain and Portugal, would come under intense pressure, and the future of the union in its current state could come into question.
What could happen to the eurozone?
Albert Edwards, a strategist at Societe Generale SA, has suggested the eurozone is heading for a break-up. He identified the problem for countries like Greece and Spain ‘is that years of inappropriately low interest rates resulted in overheating and rapid inflation.’ [1] Edwards added that ‘any help given to Greece merely delays the inevitable break-up of the eurozone.’
Despite these bleak predictions, EU finance ministers seem to have put together an action plan to help Greece tackle its spiralling debt and stabilise the euro. The precise details of the plan remain unknown, but the other member countries appear to realise the domino effect that not intervening could have. The European Central Bank has also pledged to assist in the rescue effort, with ECB president Jean-Claude Trichet confirming ‘that the ECB will work with the European Commission in monitoring the implementation of the recommendations by Greece.’ [2]
What’s the future for the euro?
The euro is currently trading near a 9-month low against the dollar and Greece’s problems could continue to undermine the stability of the single currency; before the creation of the eurozone, forex traders could have simply offloaded drachma if they were concerned about Greece – now they have to sell the euro.
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Source: [1] Bloomberg (12 February 2010), [2] Times Online (12 February 2010)
