Continued European weakness, not a Greek default, concerns ECB

European finance ministers are preparing to meet to approve a $172 billion bailout of Greece today. As even casual observers of the European financial crisis have come to realize – nothing is certain in this Greek drama. There is not even certainty that a default would be the worst outcome.

The Australian reporter David Uren contends that a Greek default would not necessarily result in either a break-up of the euro, nor would “plunge the world economy into crisis.”

Many private banks have already written down a potential Greek default, but it is the uncertainty of the larger European crisis that plagues the markets.

The European Central Bank’s newly appointed deputy governor, Philip Lowe, says there are examples of austerity measures accompanying strong GDP growth. However, there was an even more important corresponding factor – strong growth in trading partners, an ability to ease monetary policy and a fall in the exchange rate, none of which exists to Europe.

“There is therefore a material risk that fiscal consolidation weakens growth in the short run, which leads to more fiscal consolidation in order to meet previously announced targets and, in turn, yet weaker growth,” he tells The Australian.


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