ECB and the Eurozone Crisis


1/5/2014

A few years back the euro zone crisis was foremost in the minds of all bankers and financiers. The European officials openly speculated about a Greek exit from the euro. Greece bluffed its way to join into the euro zone with false statistics about growth and deficit. President George Papandreou, when he won the election in 2008 came out and declared that the budget deficit was 12 percent of GDP, double of what his predecessor had claimed.

Now a few years later, confidence has come back. Why? Mario Draghi, the ECB president said that he will take whatever action necessary to save the euro and that has been enough. The bankers and financial markets trusted his words. His words were further supported by German Chancellor, Angela Merkel who said that she will go to any extent to financially support the weaker members of the euro zone. At present Spanish 10 year bonds yield 3.07 percent which is within 4 basis points of their lower yield ever since the euro was introduced in 1999. Market confidence supported Spain to service its debt diminishing the crisis.

The European central bank didn’t have to take any action as the strong words of Mario Draghi seem enough. The market judgment therefore is that a crisis that felled governments in Portugal, Spain, Italy, Ireland and Greece and contributed to savage recessions in most of those countries has ended.

Currently the core euro zone inflation has dipped to a record low of 0.7 percent. Deflation is a distinct risk and unemployment runs at a catastrophic 20 percent or more in Spain and Greece.

Now turning our attention to India. We trust our RBI to come up with a strong statement that the worst is over for the Indian economic growth. Do they have a data support to say that? What is waiting ahead for our economy? In the past Indian economic growth in part was due to a heavy inflow of foreign capital. Now there is a threat of it drying up. No matter who wins the election? We need a strong central government to guide us through the current tough time. Instead of addressing the pressing issues we face, if they divert their attention to non-productive activities like infighting, political bickering we will have lost a chance to rebuild the economy again. Currently Russia one of the bricks country is entering recession. What is the probability that our story will be different. Let us wait and see.

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