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How Long will the EU support Greece?

February 13, 2012

Greece has reappeared in the news, as its Parliament voted Sunday night to approve a new round of austerity measures, despite massive protests in Athens that resulted in the burning down of numerous buildings (full coverage is available on the BBC and New York Times).   While Greek politicians appear to be trying hard to avert a default on its debt, the Economist asked the question, “whether they are prepared to keep handing over cash to Greece.”

Without cash from the EU, ECB, and IMF (i.e. “the Troika”), Greece would have to default.  All of the turmoil has locked the Greek government out of the international bond markets, so it can no longer borrow money from the private sector.  However, despite all of the austerity and budget cuts, Greece is still running a government deficit and has to pay down the debt it has already accumulated (talks on reducing this debt are still continuing).  Thus, Greece needs the Troika to avoid a default, but does the Troika need Greece?

Until recently, the answer was a very clear yes.  The big worry for the EU was not that Greece would default, as Greece only accounts for about 2% of the EU’s economy.  If a Greek default caused investors to lose confidence in Italy and/or Spain, then the euro would be in a major crisis, as those two countries are the third and fourth largest economies in the Eurozone.  However, as the graph below shows, it appears that Italy and Spain are regaining the faith of the global bond market, as spreads against German bonds have recently declined.

Of course, the question remains if these downward trends in Italy and Spain continue, but if Spain and Italy interest rates reach a “safe zone,” then much of the logic for the EU to continue funding Greece will have disappeared.  Then Greece may truly face the threat of default.

In order to help teachers learn more about the EU and the European Debt Crisis, the European Union Center at Indiana University is sponsoring two webinars on the topic:

  1. The Euro Crisis and European Integration on February 22, starting at 4:00PM EST and led by Dr. Dr. Andreas Hauskrecht, Associate Professor at the Indiana University Kelley School of Business
  2. Supranationalism: the Case of the European Union on February 28, starting at 4:00PM EST and led by Brant Beyer, EU Center Project Manager.

Both of these webinars are free and teachers can receive one professional growth point.  To register click here for The Euro Crisis and European Integration and here for Supranationalism: The Case of the European Union.  We hope to see you there.

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