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10 An ‘all-encompassing plan’ to solve the crisis in the Eurozone? In the Eurozone, the more economically stable nations had begun efforts to develop a holistic and ‘all-encompassing plan’. At a meeting held on 17 January 2011, they examined a series of initiatives such as increasing EFSF funds, bringing forward the establishment of a permanent stability mechanism, reforming the Stability Pact and instituting common economic governance. Negotiations, however, did not produce any results. The European Council summit held at the beginning of February 2011 made
20 The new agreement with the Eurozone (the second Memorandum) and private sector involvement Anxiety swiftly returned to Greece after the summit of 9 December 2011. The government’s primary concern was to satisfy the preconditions required for the release of the €130 billion loan. Two agreements needed to be drawn up. The first concerned the conditions of the loan. It would clarify the still unclear arrangements for the new fiscal measures and the structural changes needed to achieve the agreed targets. In sum, this constituted the new Memorandum. The second
The book examines the European debt crisis with particular reference to the case of Greece. It investigates its spillover from a Greek-specific problem to a Eurozone-wide crisis and chronicles the policy responses to combat it. The central argument of the book is that the principal cause of the Eurozone’s problems was, and still remains, the indecisiveness of European elites to tackle its underlying deficiencies. Leading Eurozone countries have been unwilling to commit to a common long-term plan which could deal convincingly with complex and inter-related problems affecting both its ‘core’ and its ‘periphery’. The guiding principle of policy responses thus far has been the pursuit of permanent fiscal discipline. Yet, fiscal discipline alone would not provide the long-term solutions required; a steady course towards economic governance and political unification is necessary.
Through the detailed tracing of the evolution of the crisis, the book provides valuable insights into the crucial interconnection between Greece’s own economic troubles and the wider European search for macroeconomic stability and sustainable economic growth. As such, the book appeals well beyond those with a narrow academic interest in Greece. This is very much a discussion about the future of the Eurozone and the European Union as a whole.
25 Cracks in the euro The effects of the Greek crisis on the Eurozone became more and more visible during the Greek election campaigns in May and June 2012. Anxiety over the cohesion of the EMU grew. The Financial Times published a commentary entitled the ‘Euro starts to crack’.1 Various central banks and investors had become increasingly wary, no longer purchasing securities in euros as they had done. By the end of May, the exchange rate of the euro against the dollar fell below the level it had been on 30 June 2010, when the Greek crisis began.2 The markets
indications that the crisis was indeed spreading: industrial output had fallen dramatically and the rate of growth had dropped to a level of virtually zero across most of the Union. Alarm bells went off in the Eurozone. Banks started selling off their sover eign bonds, they avoided subscribing to newly issued bonds by Italy and Spain, and they did not renew their loans to smaller banks. A crisis in liquidity looked increasingly likely. The International Herald Tribune noted that ‘two years of gross mismanagement of the Eurozone debt crisis have all too predictably
12.5% of gross domestic product (GDP) in 1993, to 2.5% by 1999, the year in which assessment to gauge Greece’s suitability for participation in the Eurozone was undertaken. Progress towards meeting the other criteria for nominal convergence (rate of inflation, long-term interest rates, public debt and exchange rates) was equally positive. The European Council’s decision taken at Santa Maria da Feira in June 2000 to include Greece was based on detailed scrutiny of the performance of the Greek economy, by the European Commission, the European Central Bank and the
8 The crisis spreads to the Union As well as ratifying the decision to grant the loan to Greece, the extraordinary summit of the Eurozone held on Friday 7 May 2010 discussed developments across the whole of the Eurozone. The President of the ECB, Jean-Claude Trichet, had already expressed concern that the Greek crisis could develop into a ‘systemic crisis’. American and Asian investment groups had agreed, according to Trichet, to speculate against the euro. Its value kept falling, while Spain’s and Portugal’s borrowing rates were rising rapidly, creating further
30 Cyprus The temporary improvement of the situation did not ensure peace in the Eurozone throughout the whole of 2013, as the Eurogroup, the European Commission and the IMF had hoped. In March, developments in Cyprus provoked unforeseeable and severe turmoil, indicating that the measures constructed to guard against future risk in the single-currency area were not sufficient. The risk of an economic crisis erupting in Cyprus had grown steadily following the restructuring of Greek debt in the spring of 2012. Owing to the haircut of Greek sovereign bonds, the
motion, changes and the inescapable disputes that accompany them. Greece triggered the crisis in the Eurozone, but was not the cause of it. The cause is inherent in the fact that the Eurozone is a full monetary union but an imperfect economic and fiscal union of member states with different structural features; the mature economies of the European North differ significantly from the less mature economies of the South. The current crisis is a public debt crisis only to a small degree, and in that dimension it largely concerns only Greece and Portugal. The causes of the
sector, at the beginning of June,1 sounded further alarm bells across the Eurozone. The Iberian nation’s preference was for direct support from either the EFSF or the ECB for its banks. Germany, however, favoured an official request from Spain, which would entail conditionality, comparable to the adjustment programmes in Greece, Portugal and Ireland. This time the EU moved decisively. On 9 June the Eurogroup decided to grant direct funding from the EFSF and the ESM totalling €100 billion for the recapitalisation of the Spanish banks.2 The loan would be taken up, on