The eurozone faces its most serious situation yet

Civitas, 27 January 2010

This week, the Financial Times (FT) predicted that Germany’s economic recovery ‘may be stalling‘, a seriously concern for Europe’s largest economy. And in the UK, figures released yesterday by the Office of National Statistics (ONS) revealed that the UK economy is only limping out of its deepest recession in modern times (the economy grew only 0.1% in the last 3 months of 2009).

A real concern is that ‘growth’ in European economies could  fall back into a ‘double dip’ recession.

The EU has a €50 billion programme which gives emergency assistance to non-eurozone member states alongside support from the International Monetary Fund (IMF). The programme was used in 2009 to help Hungary, Romania, and Latvia.

But this programme can bring no comfort to eurozone members. Specifically, the dire state of Greece’s public finances is presenting a big headache for the remaining members of the eurozone. Following a report from the EU Commission on 13th January which criticised ‘deliberate misreporting of figures by the Greek authorities in 2009’, Eurozone chief Jean-Claude Juncker is seeking to empower the EU’s statistics office (Eurostat) to audit elements of national government accounts. But giving EU auditors the power to snoop through Greece’s books will not solve its problem. As a member of the eurozone, Greece does not qualify for EU/IMF bailout money, and even if it did, Greek and EU politicians alike are keen to downplay Greece’s pennilessness (sorry, ‘centlessness’).  This is because, as the Wall Street Journal (WSJ) notes: ‘persistent fears about Greece’s fiscal situation have turned trade in the euro into a vote on the currency bloc’s credibility’.

The Greek government has repeatedly denied that it is seeking outside help with its public finances; Greek Central Bank Governor George Provopoulos argued in the FT that Greece will be able to solve its economic problems from within the eurozone. However the WSJ recently reported that financial markets are ‘unconvinced by the Greek government’s assurances‘ and a leaked EU Commission report  simply asserted the ‘Greek deficit ‘endangers’ the euro‘. Furthermore, EUObserver describes that a ‘collection of prominent voices’ have been warning that indebtedness will ‘hamper economic recovery and spook financial markets’…

In Die Welt this week, the Chief Economist of Deutsche Bank Thomas Mayer stated: ‘The situation is more serious than it has ever been since the introduction of the euro. The trouble is Greece plays a key role for future development.’ When asked what the worst case scenario could be, he said simply: ‘If the Greece situation is handled badly, the Euro-zone could break down, or suffer major inflation.’