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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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.
One has to wonder what Olli Rehn, the European Union’s Commissioner for Economic and Monetary Policy Affairs, is looking at when he boldly asserts that deflation is not a risk for Euro member countries. Not only does he seem to be glossing over the rapid pace of disinflation that has already occurred in Europe.
Many major world economies are at risk of slipping from a period of falling inflation (disinflation) into outright negative inflation (deflation), and the eurozone is leading the trend. The European Central Bank and Fed in particular must strive to avoid this outcome by striking a balance between continuing quantitative easing and tightening monetary policy.
Easy global liquidity from quantitative easing in the United States has masked deflation and public debt vulnerability in the European periphery, and the European Central Bank shows little sign of pursuing policies to address these threats.