A Very European Crisis

Greece’s entry into the euro zone nine years ago benefitted the country but also masked significant structural problems. The stability of the euro allowed Greece to borrow at lower interest rates; but it papered over a more serious lack of fiscal discipline. That is, while GDP was growing, Greece could take on more debt without appearing over-leveraged. But any drop in GDP would expose the country to significant risks – precisely what is occurring now. But the Greek situation is emblematic of a growing north-south split in the euro zone with other countries like Spain, Portugal, and Italy thought to be at risk of default due to large debt burdens. Hence, Greece is a thorny problem for the entire EU, which by law prevents bail outs. That is, the choices are bail out Greece, abrogating a founding law and encouraging moral hazard; or, allow Greece to fail, potentially spreading contagion. On the other hand, the IMF could bailout Greece. But euro zone nations are loathe to accept this tactic because it suggests they cannot solve their own problems. Ultimately, the financial integration fostered by the euro has benefited the member countries of the monetary union in good times, just as it is creating difficult choices for such countries in bad. –YaleGlobal