The press is buzzing with talk of Greece leaving the euro. And if Greece leaves, what next? The press is also buzzing with talk of a possible, if not probable, breakup of the euro altogether – a Eurodämmerung as Paul Krugman calls it.
So is Greece likely to leave the euro, or will the Greek electorate vote next time for the parties supporting the austerity package they negotiated with the EU?
If Greece does leave the euro, what would be the implications for the Greek economy? And what would be the implications for the rest of the eurozone? Would it fall apart: would there a be a domino effect to Spain, Portugal, Italy and Ireland and then the whole eurozone? Or would Germany and the ECB do whatever was necessary to prevent any more countries leaving?
The following articles ponder these weighty questions. In the meantime, stock markets around the world have plunged on fears of the damage a disorderly Greek exit could do to the eurozone and to the global economy.
Greece, euro exit and the drummer in the band Reuters, Luke Baker (14/5/12)
Greek fire could singe rest of euro Financial Times, Richard Milne and Patrick Jenkins (14/5/12)
Eurozone: If Greece goes … Financial Times, Chris Giles, Peter Spiegel and Kerin Hope (13/5/12)
How would Greece leave the euro? BBC News, Kabir Chibber (10/5/12)
CBI: Greece eurozone exit ‘would be like an earthquake happening’ The Telegraph, John Cridland (14/5/12)
Forget what you’re hearing: Greece won’t quit euro soon Globe and Mail (Canada), Brian Milner (14/5/12)
Could the euro survive a Greek exit? BBC News, Robert Peston (14/5/12)
Greekonomics (see also) BBC News, Paul Mason (9/5/12)
This is how the euro ends – not with a whimper but a bang The Telegraph, Jeremy Warner (15/5/12)
EC and ECB working on emergency plans for Greek euro exit, says trade commissioner Karel De Gucht The Telegraph (18/5/12)
Fiddling while Athens burns The Economist (19/5/12)
Exodus, chapter 1 The Economist (19/5/12)
The Greek run The Economist (19/5/12)
Greece will leave the euro. But what then? Independent on Sunday, Hamish McRae (20/5/12)
No quick fix for Euro – maybe a slow one? BBC News, Stephanie Flanders (24/5/12)
Questions
- If Greece left the euro, what would happen to bank deposits in Greek banks?
- What would be the costs and benefits to the Greek economy of a reintroduction of the drachma?
- Why might individuals and companies, if they were able, move their euro deposits out of Spain, Portugal, Ireland and Italy into accounts based in other eurozone countries? What would be the implications of such financial flows?
- What can the ECB do to support the banking systems in vulnerable eurozone countries? Is there any theoretical limit to the amount that the ECB can offer?
- What is the role of the central banks of individual eurozone countries in a transfer of large-scale funds from one eurozone country to another? How does this impact on the receiving country (e.g. Germany)?
Well they say that a day is a long-time in politics – that an awful lot can happen within 24 hours. The two days of the G20 summit have seemed like a lifetime. The meeting took place in Cannes from 3 to 4 November, 2011. It was the sixth such meeting of the G20: the 19 largest developed and developing countries plus the European Union.
As chair of the meeting, President Sarkozy of France had planned to address the two key global issues of securing a sustained global recovery and strengthening the global banking system. He also wanted to address other issues, such as climate change, commodity price volatility, social inclusion, corruption and corporate governance. But although these issues are covered in the final communiqué, what took centre-stage for the whole summit was the crisis in Greece and its impact on the eurozone.
The drama began on Monday 31 October. The Greek Prime Minister, George Papandreou, decided to call a referendum on the agreement reached at the eurozone summit in Brussels the previous week. In return for banks being required to take a loss of 50% in converting existing Greek bonds into new ones, Greece would have to continue with its tough austerity measures: measures that have caused the Greek economy to implode.
With worries that (a) the referendum would create several weeks of uncertainty, (b) that the agreement might then be rejected, (c) that the government might fall, stock markets plunged. French and German markets fell by over 5%. The Athens stock market fell by 7 per cent. The yield on Italian bonds passed 6%, amidst fears that if Greece defaulted, so too might Italy. But if the eurozone could survive a Greek default, it might not survive an Italian one. Even though several members of Mr. Papandreou’s Pasok party demanded his resignation, he stuck to his guns that an agreement had to have the consent of the Greek people. That was Tuesday.
The next day, Wednesday, was the start of the two-day G20 conference. What was to have been a meeting addressing wider issues of the global economy, was now having to focus on the Greek crisis. President Sarkozy and Chancellor Merkel made it clear that the next tranche of bailout money to Greece would not be paid until the deal agreed in Brussels was accepted by Greece. They gave the first indications that they might accept Greece’s withdrawal from the eurozone.
On Thursday afternoon, Mr Papandreou signalled that he would back down from the referendum if the opposition New Democracy party would join him in supporting the Brussels deal. He would not resign. But the opposition leader, Antonis Samaras, said that his party would not join with Mr Papandreou and that the Prime Minister should indeed resign. He did not resign, but abandoned the calll for a referendum.
With the Greek crisis dominating the meeting, little concrete agreement was reached. One important outcome, however, was the recognition that the financing of the IMF should be strengthened. As the final communiqué states:
We will ensure the IMF continues to have resources to play its systemic role to the benefit of its whole membership, building on the substantial resources we have already mobilized since London in 2009. We stand ready to ensure additional resources could be mobilised in a timely manner and ask our finance ministers by their next meeting to work on deploying a range of various options including bilateral contributions to the IMF, SDRs, and voluntary contributions to an IMF special structure such as an administered account. We will expeditiously implement in full the 2010 quota and governance reform of the IMF.
But despite this recognition of the key role of the IMF, the agreement was essentially that an agreement would be needed!
Articles
Eurozone crisis: yet another twist to Greek farce keeps leaders on edge of seats The Telegraph (4/11/11)
G20 summit: the main issues at Cannes The Telegraph (3/11/11)
Quick! More sandbags (filled with cash) The Economist, Charlemagne’s notebook (4/11/11)
The burning fuse The Economist, Charlemagne’s notebook (4/11/11)
G20 leaders agree to boost IMF resources BBC News (4/11/11)
G20 summit fails to allay world recession fears Guardian, Patrick Wintour and Larry Elliott (4/11/11)
G20 summit: roll call of doom for a dysfunctional family Guardian, Angelique Chrisafis (3/11/11)
Euro zone finds no new money for debt crisis at G20 The Economic Times of India (4/11/11)
Shares jump after referendum ditched New Zealand Herald (5/11/11)
Bunds rise on EFSF worries, Italy under pressure Reuters (4/11/11)
Eurozone crisis: The possible resolutions BBC News (4/11/11)
The G20 aren’t running to Europe’s rescue BBC News blogs, Stephanie Flanders (4/11/11)
Is the euro about to capsize? BBC News, Laurence Knight (4/11/11)
Final Communiqué
Meeting of Finance Ministers and Central Bank Governors: final communiqué G20–G8 France 2011 (4/11/11)
Questions
- Why might the ‘game’ between the eurozone leaders and George Papandreou be seen as a prisoner’s dilemma game? What are the payoffs?
- Why might increasing the bailout for Greece represent a moral hazard for the eurozone leaders?
- Trace through market reactions between the 31 October and the 4 November and explain the movements.
- How crucial is the IMF in achieving global stability and economic growth?
- Assess the success of the Cannes G20 conference.
With a mounting crisis in the eurozone, heads of government met in an emergency meeting in Brussels on 21 July.
The task was a massive one: how to tackle Greece’s growing debt crisis and stave off default; how to protect other highly indebted countries which have already had to seek emergency bailouts, namely Ireland and Portugal, from falling market confidence and thus rising interest rates, thereby making their debts harder to service; how to prevent speculative pressures extending like a contagion to other highly indebted countries, such as Spain and Italy; how to prevent speculation against the euro and even to prevent its break-up; how to reduce the size of budget deficits at a time of low growth without jeopardising that growth. A problem is that Greece has already adopted the required austerity measures for it to receive a second bailout from the EU agreed at the end of June, and yet its debt burden is likely to rise as growth remains negative.
Eurozone leaders recognised that the stakes were high. Failure could see contagion spread, interest rates soar and perhaps one or more countries leaving the euro. No agreement was not an option. As it turned out, the agreement was more comprehensive than most commentators had expected. Markets reacted positively. Stock markets in Europe and around the world rose and the euro strengthened.
So what was the agreement? Has it solved the Greek and eurozone crises? Will it prevent contagion? Or has it merely put the problem on hold for the time being? Will more fundamental measures have to be put in place, such as much fuller fiscal union, if the eurozone is to function as an effective single currency area? The following is a selection of the hundreds of articles worldwide that have reported on the summit and the agreement.
Articles
Greece thrown lifeline by eurozone leaders BBC News, Chris Morris (22/7/11)
A Marshall plan with ‘haircuts’: The draft agreement Guardian, Chris Morris (21/7/11)
Banks forced to share pain of bailout for Greece Independent, Sean O’Grady and Vanessa Mock (22/7/11)
EU leaders agree €109bn Greek bail-out Financial Times, Peter Spiegel, Quentin Peel, Patrick Jenkins and Richard Milne (21/7/11)
Greece to default as eurozone agrees €159bn bailout The Telegraph, Louise Armitstead and Bruno Waterfield (21/7/11)
Europe steps up to the plate The Telegraph, Ambrose Evans-Pritchard (21/7/11)
Greek bailout boosts global markets Guardian, Julia Kollewe, Ian Traynor and Lisa O’Carroll (22/7/11)
Greek bailout deal: What the experts say Guardian (22/7/11)
Bailed out – again. Eurozone throws Greece €109bn lifeline Guardian, Ian Traynor (22/7/11)
New package for Greece must match last year’s if it is to stave off default Sydney Morning Herald, Malcolm Maiden (22/7/11)
Russian or Belgian roulette? The Economist, Charlemagne’s notebook (21/7/11)
Saving the euro: A bit of breathing space The Economist, Charlemagne’s notebook (22/7/11)
Europe’s ‘safe haven’: corporate bonds Financial Times, Demetrio Salorio (21/7/11)
Summit that saved the euro? Financial Times, John Authers and Vincent Boland (21/7/11)
Greece aid package boosts stock markets BBC News (22/7/11)
Q&A: Greek debt crisis BBC News (22/7/11)
Timeline: The unfolding eurozone crisis BBC News (22/7/11)
Eurozone summit: It may be a solution, but doubts remain Guardian, Larry Elliott (21/7/11)
German taxpayers are being asked to socialise Europe’s debts The Telegraph, Jeremy Warner (22/7/11)
The eurozone is not a nation state Financial Times blogs, Gavyn Davies (20/7/11)
One step back from the abyss BBC News blogs, Stephanie Flanders (22/7/11)
For long-term gain, the EU will have to share the pain Independent, Sean O’Grady (22/7/11)
Greek debt deal ‘not the last word’ BBC Today Progrgamme, Stephanie Flanders and Sir John Gieve (22/7/11)
Questions
- Outline the measures agreed at the eurozone heads of government summit on 21 July.
- Explain what is meant by a ‘haircut’ in the context of debts. What types of haircut were agreed at the summit?
- How big a reduction in Greece’s debt stock will result from the deal? Why may it not be enough?
- Explain how the European Financial Stability Facility (ESFS) works? How will this change as a result of the agreement?
- What vulnerabilities remain in the eurozone?
- What are the arguments for closer fiscal union in the eurozone? Is more required than merely a return to the Stability and Growth Pact?
The two biggest world exporters have signed trade deals worth $15bn (£9bn). The Chinese Premier and German Chancellor were targeting an increase in bilateral trade to £178bn over the next five years. Premier Wen has also offered support to some of the European countries struggling with their debt. Despite this offer of support, there is something in it for the Chinese economy. China’s foreign exchange reserves are at a record high, but about 25% are invested in euro-denominated assets, hence China has a very strong interest in preventing the collapse of the euro. Furthermore, it is also interested in diversifying its export market to reduce its reliance on US markets. This is particularly important given the growth in protectionism in the US economy. Mr. Innes-ker said:
“China’s dependence and exposure to the US dollar creates issues for its own economy to the extent that it’s a hostage to US monetary policy.”
China’s interest in the European economies may provide an opportunity for the UK economy, as it is a country with ideal investment conditions and is already one of China’s most important trading partners. David Cameron, in a meeting with Wen, has said he wants bilateral trade to increase to £62bn by 2015. The amount is nothing in comparison to the trade deal between China and Germany, but still a significant potential sum for the UK economy. The following articles consider the Chinese economy and its role in the global environment.
Self-interest in China’s helping hand Asia Times Online, Jian Junbo (30/6/11)
China and Germany ink $15bn trade deals as leaders meet BBC News (29/6/11)
Chinese leader’s visit to Germany ends with large trade deals The New York Times, Judy Dempsey (28/6/11)
China offers helping hand to Eurozone Guardian, Helen Pidd (28/6/11)
Rights, trade to dominate Germany-China talks Associated Press, Deborah Cole (28/6/11)
China promises EU ‘helping hand’ with debt crisis Reuters, James Pomfret and Stephen Brown (28/6/11)
We still don’t grasp how little we matter to China Independent, Hamish McRae (29/6/11)
Questions
- What are the benefits of trade?
- Why is it important for the Chinese economy to diversify its export market?
- What does it mean by the statement that China is hostage to US monetary policy?
- Why are China’s foreign exchange reserves at a record high?
- What are the reasons behind China’s interest in Europe? Is it more of a ‘helping hand’ or more to do with furthering China’s own ambitions?
- What might the trade deal between China and Germany mean for trade between China and other nations? Is the deal to the benefit of everyone?
Growth figures across many countries still remain vulnerable, including the UK, where growth lies at only 0.5%. Despite some countries starting to grow more rapidly, the numbers still remain close to 0. The eurozone area is a particularly interesting case, as there are so many individual countries that are all interdependent. So, despite growth in the eurozone area increasing to 0.8% in the first three months of 2011, which is higher than that for the UK, this doesn’t explain the full story in the area. Germany has grown by 1.5% and it is this figure which has largely contributed to the 0.8% figure. It was also helped by growth of 1% in France and incredibly of 0.8% in Greece, despite its huge debts. The growth in Greece is allegedly down to a better export market.
Why then wasn’t the figure higher? Whilst countries like Germany showed an acceleration in demand, growth remained sluggish in Spain and Italy at only 0.1% and 0.3% respectively and Portugal faced the second consecutive quarter of negative growth and so has officially gone back into recession. This situation may get even worse as the austerity measures put in place by the EU and IMF take effect. One of the key arguments against joining the eurozone is that the policies implemented are never going to be in the best interests of any one country. With some countries beginning to grow more quickly and others remaining sluggish, what should happen to macroeconomic policy? Should interest rates remain low in a bid to boost aggregate demand or should they rise as other countries see accelerating growth?
An interesting question here is why do countries, such as Italy, Spain and Portugal struggle, whilst France and Germany begin their recovery? One obvious explanation is that Germany and France are at the heart of the eurozone, where as Spain, Portugal and Italy remain on the periphery. Ken Wattret at BNP Paribas said:
“The periphery are getting the worst of both worlds. The core countries like Germany are doing really well and that’s keeping the euro strong, and it’s making the ECB [European Central Bank] more inclined to tighten policy.”
If the ECB do go ahead with a tightening of monetary policy, it could spell further trouble for those countries on the periphery of the Euro area that would benefit from interest rates remaining low and a weaker Euro. The following articles look at the conflicts within the 2-speed Eurozone.
Articles
Sterling lags euro on growth outlook; trails dollar Reuters (13/5/11)
Eurozone’s growth surprises as UK lags behind Telegraph, Emma Rowley (13/5/11)
Eurozone’s economic growth accelerates BBC News (13/5/11)
Solid finances help drive German economic revival Financial Times, Ralph Atkins (13/5/11)
UK’s economy in the slow lane as eurozone surges Scotsman, Scott Reid (14/5/11)
Euro growth eclipses rivals despite north-south divergences AFP, Roddy Thomson (13/5/11)
Eurozone economic growth data prompts political clash BBC News (13/5/11)
Fresh fears for UK economy as Germany and France power ahead Guardian, Larry Elliott (13/5/11)
Portugal’s GDP is set to shrink this year and next Wall Street Journal, Alex Macdonald and Patricia Kowsmann (14/5/11)
Data
UK GDP Growth National Statistics
Eurozone growth rates ECB
EU countries’ Growth rates of GDP in volume Eurostat News Release (13/5/11)
Real GDP growth rate for EU countries and applicant countries, EEA countries and USA and Japan Eurostat
Questions
- What has contributed to the German, French and Greek economies surging ahead?
- Why is there such a north-south divergence in growth within the eurozone?
- What is the most suitable monetary policy for those countries growing more strongly?
- What is the best direction for interest rates and hence the value of the euro for countries, such as Spain, Italy and Portugal?
- ’The UK economy would be in a worse position if it were a member of the eurozone’. What are the arguments (a) for and (b) against this statement?
- What is the relationship between interest rates, the exchange rate and growth?
The press is buzzing with talk of Greece leaving the euro. And if Greece leaves, what next? The press is also buzzing with talk of a possible, if not probable, breakup of the euro altogether – a Eurodämmerung as Paul Krugman calls it.