By: Mike Campbell
The Eurogroup is the name given to the sixteen European Union Member States which decided to adopt the Euro as their currency. To a greater or lesser extent, their fates have become interlinked such that they have agreed to meet certain economic targets to avoid any loss of confidence in the currency which would have catastrophic consequences for the whole group. These include accepting targets on maximum levels of inflation and public debt. The agreed level for financial deficit is that it should not exceed 3% of a nation’s gross domestic product (GDP) and the level of debt is restricted to 60% of GDP. In the case of the Greeks, it was recently revealed that their level of indebtedness is 113% of GDP and the deficit is running at 12.7%.
The Greek parliament has just approved a plan that calls for a reduction in the deficit to 2.8% over the next three years. It is also working on measures to reduce the debt in what has been described by the Greek Finance Minister, George Papaconstantinou, as a “very ambitious fiscal consolidation programme”.
Members of the Eurogroup have expressed their support and confidence in the actions that the Greeks are proposing. Also, the European Central Bank has described the speculation that Greece may be forced to withdraw from the single currency as “absurd” – it is not at all clear what these speculators thought the Greeks could use as a viable alternative to the Euro, even in the short term.
Credit rating agencies such as Fitch, had already downgraded the status of Greece which reflects the significance of the problems facing this EU member. The downgrade suggests that the rating agency no longer unreservedly believes in the credit worthiness of the country which means that the government has to pay higher interest rates on any loan it secures.