The Eurozone’s Fault Lines
Instead, unelected eurozone officials have taken sides in the standoff, warning of catastrophe if the Greeks refuse to accede to the creditors’ demands. The European Central Bank aided a run on Greek banks by refusing to supply enough liquidity, in the process violating its legal mandate to uphold financial stability across the currency union. Now, the central bank may only restore liquidity in a piecemeal manner as Greece complies with each step of the agreement with its creditors.
.. Following the deal on Monday, Greece faces a herculean task: Meet a very short deadline to pass a raft of reforms through Parliament, agree to yet more austerity and cede control over privatization of state assets to the eurozone in return for another bailout.
.. Rather than fostering economic convergence, the euro is driving its members apart. Despite a common eurozone interest rate, borrowing costs vary widely across the currency union because of differing rates of inflation. So-called real interest rates are higher in economically weak member states like Greece, where inflation is negative, and much lower in economically strong countries such as Germany, where inflation is positive.
As a result, capital and skilled labor concentrate in the richer regions.
.. And if there is a Greek exit, investors will be fully aware that a sovereign default could lead to a banking sector collapse. Many eurozone economies could face deep recessions despite having barely returned to their pre-crisis size. The course of Greek politics could easily be repeated elsewhere, with anti-austerity and anti-establishment parties coming to power