Foreign Policy Blogs

Crisis 2.0?

At a press conference in Berlin, following an effort by IMF boss Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet to persuade German MP’s of the necessity for a financial rescue plan, Strauss-Kahn stressed that swift action was necessary and warned of the ripple effect of failing European economies.

Greek economy crisis prompts shockwave fears

The IMF boss’ comment were followed by more bad news, as Spain’s debt was downgraded from AA+ to AA by the Standard and Poor’s rating agency. It is feared the other indebted countries such as Ireland and Italy face a similar downgrading of their credit worthiness. Greece’s debt rating was downgraded to “junk” on Tuesday. This caused the interest rate on short term Greek state bonds to hit a high of 19 % before falling back to a “mere” 16 %. Experts fear the financial crisis will spill over into all aspects of the economy.

German chancellor Angela Merkel conceded that bail-out talks must be speeded up saying, “It is perfectly clear that the negotiations with the Greek government, the European Commission and the IMF need to be accelerated.”

Merkel is, however, accused of only halfheartedly supporting the bail-out plan, as the German voters are far from thrilled with the prospect of footing the bill for their European brethren.

The aid package being offered by the EU and IMF is currently 45bn euros ($59bn). However, over the next three years the package will consist of between 100-120bn euros.

Aside from German skepticism being a problem, polls show that the Greek electorate would rather do without the bail-out package, as they consider the austerity measures that accompany the package to severe.

It appears that the necessary measures are far from popular in Europe, and that the euro zone is not well equipped to deal with such a crisis. A particular problem being that the European Central Bank does not have the power to invest in state bonds, as would be the typical reaction of a national bank attempting to stave of an economic meltdown.

Perhaps the mess will act as a catalyst for the extension of European Central Bank powers  and/or implementing a financial regulatory system – as already proposed by EU finance commissioner Olli Rehn.


 

Author

Finn Maigaard

Finn Maigaard holds an MA in history from the University of Copenhagen. As an MA student Finn focused on diplomatic history culminating in a thesis on US-Danish security cooperation in the Cold War. Finn also interned at the Hudson Institute's Political-Military Center, where he concentrated on the EU's role as a security institution, and at the World Affairs Institute as a Communications/Editorial Research Assistant. Finn currently resides in Washington, DC and works as a freelance writer, and as Program Coordinator at the University of Maryland's National Foreign Language Center.

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