Greece is on the brink of meltdown due to spiraling debt, and the deficit crisis is continentally contagious. Last year, the International Monetary Fund bailed out Greece to the tune of 110 billion euros, contingent on the implementation of strict austerity measures. On the heels of this dramatic action came bailout packages for Ireland and Portugal. And the Greek tragedy is far from over as the debate over whether to accept debt-forgiveness conditions upended the government in Athens. Furthermore, other debt-laden European nations risk going under.
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Over the past two years, European policymakers have not taken full advantage of favorable global market conditions. As a result, there remains a real risk that the Eurozone will experience yet another crisis once interest rates normalize.
Judging by the increasingly upbeat statements of European policymakers and the currently buoyant market pricing of eurozone sovereign bonds, one could think that the euro crisis is now finally behind us. However, to do so would be to ignore a whole slew of underlying problems that would suggest a very different story.
Since in principle the OMT programme allows the ECB to buy unlimited amounts of a member country’s government debt in the secondary market with a maturity of up to three years, it effectively allows the ECB to determine interest rates in the secondary market.
A growing chorus of senior European policymakers, including ECB President Mario Draghi and European Commission President Jose Barroso, keep reassuring us that the worst phase of the Euro crisis is over.
With European policymakers complacent, it is unlikely that progress will be made this year in reducing Europe’s record unemployment rate or in preventing a further fragmentation of its politics.