Saturday 3 December 2016

Greece deal highlights the euro's design flaws

The Eurogroup summit failed to give the Greek economy a realistic lifeline, and failed to bring stability to the listing eurozone

Published 19/07/2015 | 02:30

Greek Prime Minister Alexis Tsipras looks on during a swearing in ceremony of members of his government at the Presidential Palace in Athens, Greece. New ministers in Tsipras' government were sworn in on Saturday after a reshuffle expelled dissidents from his cabinet and began a new phase of negotiations for a third bailout package (REUTERS/Alkis Konstantinidis)
Greek Prime Minister Alexis Tsipras looks on during a swearing in ceremony of members of his government at the Presidential Palace in Athens, Greece. New ministers in Tsipras' government were sworn in on Saturday after a reshuffle expelled dissidents from his cabinet and began a new phase of negotiations for a third bailout package (REUTERS/Alkis Konstantinidis)

The negotiations about Greece should have had two objectives - to give Greece a shot at economic recovery, and to avoid Grexit and further destabilisation of the common currency. Neither objective has been achieved.

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The outcome of the Eurogroup summit last weekend has not moved Greece closer to an end to reliance on official lenders. The economic situation remains dire. It has, however, illuminated the design flaws in the eurozone which gave rise to the Greek crisis in 2010, and has reminded everyone that these design flaws have not been fixed. It has also created new risks for heavily-indebted eurozone members.

When states lose access to the sovereign debt markets, they can no longer run budget deficits nor can they replace historic borrowings as they fall due. In the absence of non-market support, they would be forced into immediate and possibly destructive fiscal correction. The objective of official lending programmes, as provided to countries around the world by the IMF, has been to return them as quickly as possible to credit-worthiness and hence market access, without severe contraction. The 2010 Greek 'rescue' was meant to return Greece to the markets without any need for further support after 2013. A second programme means that the first programme failed and a third programme means that the second one failed too.

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