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During the Greek crisis years, the big bugbear was a left-wing populist party called Five Star. Secondly, Italian political turmoil is raising its head again. In the end, that eventually added up to an open-ended commitment to buy the sovereign debt of the most troubled countries, which would in turn keep spreads from exploding, and allow troubled countries to continue borrowing. In 2012, he said he would do “whatever it takes” to save the euro. That’s where Mario Draghi, then head of the European Central Bank (ECB) came in.
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Not so Italy, one of the founding member states.įaced with the risk that some countries, and Italy specifically, would in effect be locked out of borrowing in sovereign debt markets, the eurozone had to take action. Imposing a depression on Greece was possible. A sclerotic economy plus a heavily-indebted balance sheet. Spain’s finances were in fact not that bad - its main problem was a massive housing bubble.īut Italy – Italy was a problem. Portugal and Ireland, being relatively small nations, basically knuckled under and imposed similar sorts of austerity packages to Greece. The “peripheral” countries included, alongside Greece, Portugal, Ireland, Spain and Italy. In other words, countries with the worst balance sheets saw their cost of borrowing rise. Bond “spreads” – that is, the gap between “safe” German debt and higher-risk countries – blew out. As a result, investors started to differentiate between eurozone countries. That assumption was shattered by the Greek debt crisis. So a Greek bond was just as good as a German bond, because they were all backed by the same thing. Countries that shared monetary policy would eventually have to share fiscal policy too. The assumption was that the euro was just the start. Investors had spent most of the early years of the eurozone (ie, the 2000s) driving bond yields closer across the region. And markets weren’t slow to pick up on this. At the end of the day – although it took the eurozone authorities a long time to come to the conclusion – Greece was sufficiently small that it could have left (or been ejected from) the eurozone, without jeopardising the survival of the single currency.īy contrast, there were plenty of other countries with messy balance sheets too.