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Untangling the Eurozone crisis

EUROZONE members are attempting to tackle Greece’s debt, fearing that the country will be forced to default and leave the Eurozone, NATALIE PLUMMER reports.

How did Greece get here?
When Greece joined the Eurozone in 2001 it was later found that Greece had lied about its budget deficit. Between 2007 and 2009 Eurostat figures showed Greece to be the most debt riddled country in all of Europe. In response to this, austerity measures were introduced by the Greek government in 2009 to reverse the damage. In 2010 another three sets of austerity measures, each one tougher than the last, were introduced but the situation only worsened. Over the course of 2010 Greece received its first bailout loan, in three parts, from the IMF and EU. Greece has since been granted a second bailout loan that is yet to be implemented.

What does austerity involve?
Austerity involves cutting back on public spending and increasing taxes, putting strain on the public. These progressively tougher austerity measures were necessary in order for Greece to qualify for loans from creditors. The Greek public were outraged by the measures, taking part in protests organised by the Unions. In June 2011, one of these protests stopped a fifth set of tougher austerity laws being passed. According to Associate Professor of ANU School of Management, Marketing and Business, Pierre Van Der Eng, “people in Greece are going to suffer”. Financial insecurity and a decline in work prospects have forced many to consider moving abroad. It seems however that austerity is the only option for Greece. According to Van Der Eng Greece is not in a financial position to pursue stimulus methods similar to those pursued in Australia in 2009.

What is the Eurozone doing to help?
The Eurozone, or Euro Area, is a grouping of countries based on their shared use of the euro as a common currency. Not all countries using the Euro have however met the criteria for membership in to the Eurozone. Currently the Eurozone is made up of 17 member countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. In May 2010, the European Financial Stability Facility (EFSF) was created to provide loans for Eurozone members. Currently, these countries are voting on expanding the powers of the EFSF and allowing Greece another larger loan. The largest economies, France and Germany, are to provide greater amounts of financial aid to Greece. It is those in the Eurozone’s interest to help Greece avoid default as it could have negative effects on the stability of the euro.

What are the possible consequences of a Greek default?
There are many views on the consequences of a Greek default. A default would mean that Greece is unable to return its loans at the specified time. Associate Professor Van Der Eng, of the ANU’s School of Management, Marketing and Business, said the impact of Greek default would be felt according to perspectives. While a default could have major consequences for Eurozone members particularly Italy and Spain, for other further removed countries default could be a more positive thing as it would create “clarity and certainty”. Within the stock markets there is currently a lot of uncertainty. Many are waiting to see what Greece’s role will be in the Eurozone in the future.

While many believe a default is inevitable, there has been talk of possibly minimising the damage under an “orderly default”. Financial writer Satyajit Das disagrees in an interview by The Financial Times and believes that in Greece’s current situation this is not possible. According to a research document titled Debt Restructuring: Ramifications for the Euro Area, produced by the European Parliament, there may be hope. In the document there are two scenarios for default. In the first scenario Greece is considered “willing but unable” to repay its loans to creditors. The debt is restructured so that banks inside and outside the country do not have to write down their losses right away, minimising the damage. The other, less desirable scenario is that Greek banks are forced to write down losses at default, and after the Greek banking system fails Greece is forced to leave the Eurozone.

Greece leaving the Eurozone would have its own consequences. Less financially stable countries such as Italy, which has recently adopted an austerity plan to deal with its debt, may be forced to also leave the Eurozone. Das believes that Spain and Italy are still salvageable. But many believe that the problem lies in the creation of the Eurozone and its shared common currency. The Eurozone was created for political as well as financial benefits. While politically the Eurozone works, it lacks the monetary tools to protect its currency. Therefore, some believe the euro eventually should be split up regardless of whether Greece is forced to leave.

How does Greek debt measure up to the rest of the world?
Greece is certainly not the only country with a large amount of debt. The United States and Japan are two such examples. When Japan’s bubble economy crashed in 1991 the country was forced to deal with similar issues to that of Greece. According to Van Der Eng, “Debt is still very high in Japan, most likely higher than in Greece.” Van Der Eng also prompts that the situation in Japan was very different. Greece may have even more difficulties returning from its crisis.

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