By: Dr. Mike Campbell
The Eurozone crisis was triggered by concerns that Greece, Ireland and Portugal might be unable to meet their financial obligations due to the scale of public debt and deficits in the aftermath of the acute phase of the global financial crisis. The rates that these nations were being asked to pay became unsustainable and, ultimately, all three accepted EU/IMF bailout funds in order to ensure they could meet their responsibilities.
In an interview in Germany’s Bild magazine, Mario Draghi, president of the European Central Bank (ECB) said: “the worst is over, but there are still risks. The situation is stabilising”. Since the Eurozone crisis was always a question of confidence, largely, the ECB president may well be right. Despite a second bailout which involved a debt-swap, Greece still has a public debt of more than €210 billion. Given that the crisis has pushed Greece deep into recession, it will take many years before the debt can be reduced to a manageable level which could be paid off. However, for the time being, the markets have regained some measure of confidence that the Euro sovereign debt crisis can be managed and the Euro has been strengthening against other major currencies.
The ECB has lent European banks more than half a trillion Euros at low interest rates in order to ensure their liquidity and bolster confidence in the markets. The injection of funds was made via the Long Term Refinancing Operation in two phases, December 2011 and February 2012 when market nervousness was at its worst. The ECB has seen no need to support Eurozone members by purchasing their sovereign bonds for several weeks now; an indication that investor confidence is rising.
Whilst the sovereign debt crises may have passed through its acute phase, many challenges still lie ahead before the EU sees a return to fuller employment and substantial economic growth – but one step at a time...