So sang Greek Minister of Finance GiorgosPapakonstantinou to Jean-Claude Trichet, President of the European Central Bank, just a few short years ago: "Jean-Claude doesn't know/that the Euro and I/borrow way too much/every fiscal year."
Last Thursday, one of the most pivotal moments in the ongoing Eurozone crisis unraveled in spectacularly boring fashion. Slovakia, the poorest country in the Eurozone, voted to approve the 440 billion euro relief package drawn up by Eurozone officials. After failing to pass the legislation earlier in the week, Thursday's vote gave a sense of hope in what has become a long, controversy-fraught process. The principles of the problem are basic: Greece borrowed a ton of money, spent more and now they're broke. In September, Bloomberg News reported that Greece has a 98 percent chance of defaulting on its debt in the next five years … 98!
With default all-but-inevitable, the European Central Bank (ECB) has had to face the difficult task of fixing not just one country, but 17. As if this weren't difficult enough, stronger economies, like those of Germany and France, don't want to see policy that might dampen their flourishing recoveries. Despite the weak, Troubled Asset Relief Program-reminiscent plan, the ECB has largely had its hands tied.
Further, the Eurozone lacks one of the key tools in fighting national (or in this case, international) debt: monetary policy. Unlike the Federal Reserve, the ECB can't just "print money" or enact a round of quantitative easing. All economic policy can be broken down into two categories: monetary policy and fiscal policy. Monetary policy is controlled by the national bank; it deals with the money supply. Today this largely deals with the buying and selling of Treasury bonds. Monetary policy also sets interest rates for banks and lenders, which eventually becomes the basis for most homeowners and borrowers. Fiscal policy, on the other hand, is known as the more politicized side of policy. It sets tax rates, controls stimulus spending and (sometimes) reduces the deficit.
Though monetary and fiscal policies are not linked, they often work together, both in times of recession and rapid growth. Though fiscal policy plays an important part in controlling the economy, it must write legislation, undergo debate and pass through Congress before it can take effect. Monetary policy, however, can slash interest rates at the snap of a finger.
This is the root of the problem. Since there is no "Euro Bond," the role of monetary policy falls on the individual countries. France and Greece have 10-year bonds. Since they're in the same currency, they should have similar rates, but Greece's rate is nearly six times higher. The ECB can't effectively fix the Greek bond without dealing a blow to the French bond. It can't print money because each country has its own debt.
Thus the Eurozone must rely on fiscal policy alone, which explains the painfully slow process that's been going on for more than a year. If the European (i.e., Greek) Financial Stability Facility passes, it will be used to provide some breathing room on its payments and hopefully tie the Eurozone over until a more permanent solution can be achieved.
Yet since last year, Portugal, Spain and Italy have fallen into similar situations. The ECB must react quickly if it wants to salvage its miraculous experiment of the single currency.
If Greece does go into default, it will deal a shocking blow to a system that's barely 10 years old. What happens when a euro invested in France comes back with a few pennies of interest, and a euro invested in Greece doesn't come back at all? I don't think the euro will survive another decade, but I'd love to be proven wrong. I hate those damn exchange rate fees.
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Walt Laws-MacDonald is a freshman who has not yet declared a major. He can be reached at Walt.Laws_MacDonald@tufts.edu.
