When unity is not strength – Greek Fiasco

On 1^st Jan 1999, eleven European countries joined together and adopted Euro as their official currency. These eleven countries joined forces with an intention to bring stability to the region and also to develop an alternate currency to dollar. With the advent of Euro, it made trade, investment and travel easier for these European countries. Also joining together made currency of each of these countries stronger. Euro was considered to be as strong and stable as dollar or yen. In 2001, Greece became the twelfth country to adopt Euro as its currency. Decision to include Greece in the list was more of a political decision than an economic one because Greece was not as stable as other countries in the region. A clear north-south divide in Euro was prominent. On one hand there were countries like Germany, in North, which had a strong economy and which relied on exports to power its growth, saved hard and ran trade surpluses. On the other hand, Southern economies such as Greece leant too much on consumer spending, had weak public finances and relied on foreign capital to supplement their low savings. This was the coming together of two un-equals and differences were obvious. But still Euro members went ahead and included Greece within their fold. As they say, when economy is booming everything you touch becomes gold and so was the case of Euro, it moved from strength to strength and problems with Greece was neglected. Some people had predicted that such a situation would arise soon after the inclusion of Greece in the group. For Greece, membership was a boom. It allowed government to refinance debt in favourable terms and also improved the sovereign rating of the country and thus gave easy access to long term borrowings.

But history continued to haunt Greece. Always known to have fiscal trouble, Greece continued with its chronic budgetary mismanagement, resulting in public debt to increase more than 100% of GDP and fiscal deficit to increase to 12.7% of GDP. And now rating agencies have reduced the ratings of Greece to BBB- and thus downgrading the sovereign rating of the country. There have been many voices which are suggesting removing Greece from the group and still many who are insisting to keep it within the group. It will be a tough decision for Euro to decide whether to bail out or to let IMF bailout Greece from this financial mess. The treaty governing the European Union includes a “no bailout” clause, forbidding countries from assuming debt of others. But then it would set a very bad precedent for Euro if it lets one of its member default, so the logic step would to bailout Greece themselves and then enforcing steps to ensure that Greece would not resort to such loose fiscal measures in the future.

Some experts are calling this as the beginning of the end of Euro. But we all know it’s always good to get pot holes at the start of the journey so that you learn to build the road to the future and this is just the beginning of the Euro journey.