User:Nick Gardner /Sandbox
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Policy toward Greece
- (a) conditional loans at below the market rate of interest;
- (b)sponsorship of a restructuring of the government's debt;
- (c) fiscal transfers from other Eurozone countries to Greece;
- in addition to which the Greek government has the option of
Option (a) would result in the Greek government's default because, without external support, it would not then be able to repay its maturing debt. (Further borrowing would only be possible at interest rates that would be so high that it would make matters worse). There would in principle be a degree of contagion of the problem by any country with large holdings of Greek government bonds (but it appears that no other country is in that position
[1]). There would also be contagion by some of the other PIIGS countries because the realisation that they could no longer count on financial support from the Eurozone would prompt investors to demand increased risk premiums. Some contagion by Portugal and Spain has happened in anticipation of a default.
Option (b)serves to avoid immediate default and may provide the Greek government with a long-term opportunity to return to fiscal sustainability, depending upon the terms of the loan.
Option (c) offers a similar prospect, depending upon the terms of the renegotiated debt.
Option (d) could enable an immediate return to fiscal sustainability.
Option (e) can be dismissed because it would be so costly for Greece[2] as to be impracticable.
Eurozone economic integration
As the crisis spread from Greece to the other PIIGS countries, there was widespread agreement that a choice would have to be made between the abandonment of the euro and the adoption of the centralised control of economic policy. Support in principle for the latter option was expressed by President Sarkozy and Chancellor Merkel in December 2010[3], and again August 2011[4], when they advocated the creation of a "true European economic government" - although they had not reached agreement upon more than a limited initial move in that direction [5]. There were mixed reactions from other eurozone countries[6] and there is likely to be strong opposition, both to the eventual replacement of government debts by "eurobonds", and to the centralised control of fiscal policy.
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- ↑ See the exposure data from Barclays Capital, reported in The Economist [1]
- ↑ Sam Fleming: Devastating price of euro failure, Times, 7 September 2011
- ↑ Gerrit Wiesmann and Peter Spiegel: Merkel and Sarkozy call for deeper union, Financial Times, December 10 2010
- ↑ Highlights - Merkel, Sarkozy news conference, Reuters 16 August 2011
- ↑ Letter to President van Rompuy, Financial Times, 17 August 2011
- ↑ Factbox: Eurozone reaction to Franco-German integration push, Reuters 17 August 2011