Broader Implications Greece has a small economy accounting for only 24 of total

Broader implications greece has a small economy

This preview shows page 19 - 21 out of 26 pages.

Broader Implications: Greece has a small economy, accounting for only 2.4% of total Eurozone GDP, but the implications of its crisis are far-reaching. Fundamentally, Greece’s crisis has exposed some of the fears expressed by economists when the Eurozone was created. They worried about the tensions that could be created by a group of different countries sharing a common currency and monetary policy, while maintaining national fiscal policies. Greece’s debt crisis showed that these concerns were valid and that European leaders and EU institutions were not prepared to swiftly respond to such a crisis. The Greece crisis has sparked larger discussions about how to resolve the tensions between a common monetary policy with national fiscal policies, while keeping the monetary union intact. Greece’s crisis has also raised a number of more specific economic and political implications, detailed below: First, the policy responses to Greece’s debt crisis have set precedents for how the debt crises in other Eurozone countries have been handled. The original crisis response for Greece focused on the provision of IMF and European financial assistance, in combination with austerity and structural reforms. This policy response was contentious and took weeks to negotiate. When Ireland and Portugal needed assistance, however, their programs were easier to negotiate, because Greece served as a template for designing the crisis response. Second, Greece’s crisis has exacerbated concerns about the health of the fragile European financial sector. Several large European banks, such as BNP Paribas, Société Générale, Deutsche Bank, UniCredit, and Intesa, are believed to be major private holders of Greek bonds. There have been continuing concerns about how these banks would be able to absorb losses on Greek bonds should Greece default or restructure its debt, particularly given widespread concerns that European banks may be undercapitalized. Specifically, there are concerns that the crisis could be transmitted through the European financial sector, triggering broader instability and requiring governments to recapitalize banks. These tests examined how well European banks could absorb losses on distressed Eurozone bonds. Most banks 18
Image of page 19
performed well under the various scenarios laid out in the tests, but some questioned whether the tests were stringent enough. Third, Greece’s debt crisis has created new financial liabilities for other European countries. Eurozone countries have extended bilateral loans to Greece, and made financial commitments to the broader European Financial Stability Facility (EFSF). If these financial commitments are called on, they could substantially raise the debt levels in Eurozone countries, many of which are grappling with their own debt problems. Fourth, the Greek crisis has highlighted the policy constraints on members of the Eurozone.
Image of page 20
Image of page 21

You've reached the end of your free preview.

Want to read all 26 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors