Will Greece Impede Economic Recovery in the Eurozone?

By Erica DeMond '17

The Greek debt crisis and impediments in the Eurozone bailout plan are far from over; negotiations continue while the European Central Bank’s aid to Greece has frozen. On Tuesday, the ECB raised the ceiling for the amount of money that Greece can borrow under its bailout plan from €73.2 to €74 billion, an indication of Greece’s dire financial circumstances. However, Greece will only be able to unlock this additional aid if it can prove that it is implementing sufficient austerity measures. The uncertainty of Greece’s future membership in the Eurozone dampens the positive results of the ECB’s recent expansionary policies and raises concern over the Eurozone’s future.

Greece has continually faced negative sentiment among international public officials regarding its ability to rein in spending. Greek Prime Minister Alexis Tsipras, part of the radical left wing party that came into office in January, Syriza, had initially promised anti-austerity actions and a renegotiation of the unpopular €240 billion bailout plan. However, other members of the European Union were not happy with Greece’s request for more aid without intentions of reform. In late February, a four-month bailout extension was granted, conditional on Greece’s ability to implement sufficient austerity measures. Until the ECB and International Monetary Fund are confident in Greece’s ability to cut spending, bailout disbursements will remain frozen.

The Eurozone’s economy has seen success from the ECB’s recent expansionary monetary policies despite the burden of Greece’s debt crisis. ECB president Mario Draghi announced a €1.14 trillion asset-purchasing stimulus program in late January that will last either through September 2016 or until the ECB reaches its 2% sustained inflation target. Monthly government expenditures will remain at €60 billion through the end of this program and interest rates will remain at a record-low level of 0.05%. This quantitative easing has helped boost industrial production in the EU, which was up 1.1% from January to February. Bond values have also risen with banks’ positive expectations of an increase in demand for corporate loans.

There are concerns whether this growth will last, especially given the potential of Greece defaulting on its loans. Some believe that the strengthening Eurozone economy could handle the blows caused by Greece exiting from the euro. Olivier Blanchard, IMF chief economist, believes that the economic growth due in part to the ECB’s stimulus measures will stabilize the euro and offset the damage of a Greek default. However, others remain more skeptical of recent economic growth and believe that risks of persistent low growth and low inflation remain. These considerations are contingent on bailout negotiations and the effectiveness of the ECB’s expansionary actions in the coming months.

Sources:

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