You know things are getting contentious in the Eurozone when the newly-elected Greek Prime Minister, Alexis Tsipras suggests Germany may owe Greece war reparations.
Talk of reparations is a distraction from the real issue which, according to Financial Times, is the possibility that Greece will need a third bailout when the current one expires. Yet, the new prime minister has promised to end austerity measures. Members of his government have described those measures, which were implemented before Eurozone leaders would agree to the first Greek bailout, as “fiscal waterboarding.”
You may recall the euro crisis. Back in 2009, the European Union (EU) insisted France, Spain, Ireland, and Greece reduce their budget deficits (the difference between what a government spends and what it receives in taxes). The Eurozone set a limit for debt (the accumulated value of deficits) at 60 percent of gross domestic product (GDP) which is the value of goods and services produced by a country.
In December 2009, Greek debt was $442 billion or about 113 percent of GDP, according to the BBC. After the discovery of irregularities in Greek accounting and a flurry of concern Greece would have to leave the euro, the country implemented an austerity program to reduce the deficit which included severe cuts to public spending. The program was well received by the EU, and EU leaders agreed to a major bailout for Greece which included writing off about 50 percent of the country’s debt.
In recent days, the Greek people have been cheering as their new government reverses the reforms implemented by the previous government and talks tough with Greek creditors. The Greek government is seeking additional financial assistance from other Eurozone countries but insists it will not adhere to the reforms previously in place. Eurozone leaders have expressed willingness to extend the current bailout as long as Greek fiscal reforms remain intact. Negotiations have begun to bridge the gap.
Greek market performance shows not everyone is impressed with the new government’s stance. The yield on three-year Greek bonds had risen to 17 percent at the end of January, and bank shares had lost significant value. The Economist reported:
“So back to the markets and the game of chicken being played between Greece and the EU. A Grexit [Greek exit from the euro] might cause problems for the EU in the form of losses for the ECB and others on bad debts… But, as we have seen, Greek financial markets are tanking. So investors clearly feel the EU has a stronger hand to play.”
It seems to be a good time to reflect on an old saying: Beware what you wish for; you just might get it.