By Harshmeet Singh
The Eurozone financial crisis doesn’t seem to have an end in the near future. The storm that kicked off in Greece has managed to grip the entire Eurozone with considerable ease. With the blame game running high among the multiple actors involved, it would be worth analyzing the role of eurozone bosses and Greece in the entire context.
ECB’s Quantitative Easing (QE)
The negative inflation recorded by European Union (EU) in the past few quarters has forced the European Central Bank to take upQuantitative Easing to pump up the money supply in the markets. Mario Draghi, ECB President, recently announced his bond buying plans according to which, the bank will buy private bonds worth 10 billion Euros and state bonds worth 50 billion Euros every month, starting from March 2015. While this could have been an ideal situation for Greece, Draghi’s ‘terms & conditions’ were a major setback for the Greek government. The ECB President announced that the bond-buying program would only include the bonds which have a minimum of BBB- rating, and not the junk bonds – which is the current rating of most Greek bonds. The entire QE program is shaped to inject 1.1 trillion Euros into the EU economy.
Germany’s opposition to ECB’s Easing
Germany has been extremely vocal regarding its opposition to the proposed QE program. It has warned Draghi regarding the possible devaluation of the euro currency. The German fears arise from their past experience when they resorted to reckless printing of currency notes before World War 2 to pay off their huge debts. The high volume of currency in the market decreased its value to such an extent that the plain paper used for printing the currency started to cost more than the currency itself. This describes Angela Markel’s staunch opposition to the QE program.
Greece Anti-Austerity measures
Reckless governance and false promises made by the Greek government set the ball rolling. A slew of public welfare schemes coupled with loss making PSUs forced the Government to borrow from the European Banks. Cases of mass tax evasion and ripple effects of the US sub-prime crisis further worsened the economic situation and resulted in the ‘Sovereign Debt crisis’ as Greece was unable to pay back its loans. With no previous payback promises fulfilled, it is easy to understand why no one wants to come forward and give them a helping hand.
Draghi’s refusal to buy Greek bonds for the first six months of the QE program has further pushed Greece to the corner. He has put forward a number of austerity measures for the Greece government, in return for his help. These austerity measures include closure of various welfare schemes, cutting down on fiscal deficit, increasing tax rates and giving record of the previous bailout package. Just when the things looked set for Greece to get another bailout package, the newly elected ‘leftist’ Syriza Government rejected the bailout terms and called the previous bailout agreements as ‘void’, inviting sharp reactions from other Eurozone nations. The new PM, Alexis Tsipras, has firmly rejected the austerity measured put forward by Eurozone against the conditional loan.
Greece’s Eurozone exit
Playing the ‘threat’ card, the Greek government has floated plans to leave Euro if the bailout package is not handed over to them. The after-effects of which include a new currency for Greece in the form of ‘Drachma’. This move may spell trouble for both the sides. For Greece, a weak currency would mean extremely expensive imports of essential commodities such as crude oil, while the EU powers, on the other hand, would have to let go of their hopes of loan recovery if Greece switches to a new currency. Further, there is also a possibility of the new Greek government shrugging off all the agreements made by the previous government and refusing to repay the previous loans.
What Greece wants
Greece’s demands are simple. Buy our bonds, give us more bailout money and write-off our previous debts. While this may seem straightforward at the first go, the EU understands that bending to these demands would set a disastrous precedent for the other borrower nations.
The round of negotiations is still on and who blinks first remains to be seen.