Myths and money
7th Mar 2010
Jamie Farquhar looks at the impact of Greece on the Euro
Will Greece’s actions topple the Euro? (Photo: Shaziya Butt)
PLUTUS, the Greek god of wealth, spread money throughout the land to those of high morality. He was later blinded by Zeus, resulting in him giving indiscriminately. At the end of Aristophanes’ eponymous play, he has his sight restored and starts to take back wealth from the unvirtuous. In the current economic crisis it seems lenders have suddenly had their sight restored and want their ‘wealth’ back, while the previous government had filled the role of Zeus.
When Greek Prime Minister, George Papandreou, and his party came to office they quickly revealed the Government deficit (the amount the Government owes) was not the accepted 3.7 per cent of GDP (Gross Domestic Product), but a staggering 12.5 per cent.
So, is this hugely important for Greece? The short answer is a big yes! Governments borrow on the sovereign debt market and in so doing they sell ‘I owe you’ notes called bonds. These agree to pay a set amount once they mature, but more importantly pay an interest rate, called a yield, at set periods.
This increased deficit, alongside Greece’s poor tax collection as well as other factors, has spooked investors. Greece now has to pay a far higher yield, and therefore has to borrow more. This is partly because investors perceive a greater risk of government default, in which case Greece will be unable, or unwilling, to keep up with payments. Governments are also able to borrow from the European Central Bank (ECB), but with new changes to policy, Greece may be locked out of this market too.
Greece is a relatively small country, with a GDP share of only 2.5 per cent of the whole currency block. So what’s the problem? If a default occurred, panic could spread to other economies. Other problem areas such as Spain and Portugal could see similar runs from their debt, which would exacerbate their problems leading to further defaults. The UK with its record deficit of £178 billion is far from safe.
While on the face of it the Euro zone agreement forbids countries from bailing out struggling neighbours, exceptions can be made in exceptional circumstances. This is where the problem lies. If a country or the ECB start bailing out struggling members, a moral hazard is created. The same argument is used for the Government’s recent bank bailout. If parties expect a bailout will be forthcoming, they may, and often do, act in a less sustainable fashion, knowing the worst case scenario is no longer complete meltdown. Another option could be an IMF (International Monetary Fund) bailout, but this comes with even more strings attached and further problems, as well as admitting that the monetary union can’t look after itself.
The current ‘best option’ seems to be for Germany to bail out Greece, but the big provider is complacent. At the Euro’s founding 55 per cent of Germans were against joining the Euro, according to The Economist. If Germany is forced to foot Greece’s bill, it may decide that the costs outweigh the benefits and that would leave the Euro without its strongest economy. Greece on the other hand may decide to drop out of the bottom. This would allow it to devalue its currency, which would in effect cut its deficit. If Germany drop the Euro, it seems unlikely the monetary union can survive.
It seems the future is uncertain. Plutus is the leading actor. His moves will decide Europe’s fate.
Myths and money
7th Mar 2010
Jamie Farquhar looks at the impact of Greece on the Euro
Will Greece’s actions topple the Euro? (Photo: Shaziya Butt)
PLUTUS, the Greek god of wealth, spread money throughout the land to those of high morality. He was later blinded by Zeus, resulting in him giving indiscriminately. At the end of Aristophanes’ eponymous play, he has his sight restored and starts to take back wealth from the unvirtuous. In the current economic crisis it seems lenders have suddenly had their sight restored and want their ‘wealth’ back, while the previous government had filled the role of Zeus.
When Greek Prime Minister, George Papandreou, and his party came to office they quickly revealed the Government deficit (the amount the Government owes) was not the accepted 3.7 per cent of GDP (Gross Domestic Product), but a staggering 12.5 per cent.
So, is this hugely important for Greece? The short answer is a big yes! Governments borrow on the sovereign debt market and in so doing they sell ‘I owe you’ notes called bonds. These agree to pay a set amount once they mature, but more importantly pay an interest rate, called a yield, at set periods.
This increased deficit, alongside Greece’s poor tax collection as well as other factors, has spooked investors. Greece now has to pay a far higher yield, and therefore has to borrow more. This is partly because investors perceive a greater risk of government default, in which case Greece will be unable, or unwilling, to keep up with payments. Governments are also able to borrow from the European Central Bank (ECB), but with new changes to policy, Greece may be locked out of this market too.
Greece is a relatively small country, with a GDP share of only 2.5 per cent of the whole currency block. So what’s the problem? If a default occurred, panic could spread to other economies. Other problem areas such as Spain and Portugal could see similar runs from their debt, which would exacerbate their problems leading to further defaults. The UK with its record deficit of £178 billion is far from safe.
While on the face of it the Euro zone agreement forbids countries from bailing out struggling neighbours, exceptions can be made in exceptional circumstances. This is where the problem lies. If a country or the ECB start bailing out struggling members, a moral hazard is created. The same argument is used for the Government’s recent bank bailout. If parties expect a bailout will be forthcoming, they may, and often do, act in a less sustainable fashion, knowing the worst case scenario is no longer complete meltdown. Another option could be an IMF (International Monetary Fund) bailout, but this comes with even more strings attached and further problems, as well as admitting that the monetary union can’t look after itself.
The current ‘best option’ seems to be for Germany to bail out Greece, but the big provider is complacent. At the Euro’s founding 55 per cent of Germans were against joining the Euro, according to The Economist. If Germany is forced to foot Greece’s bill, it may decide that the costs outweigh the benefits and that would leave the Euro without its strongest economy. Greece on the other hand may decide to drop out of the bottom. This would allow it to devalue its currency, which would in effect cut its deficit. If Germany drop the Euro, it seems unlikely the monetary union can survive.
It seems the future is uncertain. Plutus is the leading actor. His moves will decide Europe’s fate.
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