Speaking in Cambridge, UK, on Thursday evening, Jean-Claude Trichet, ECB president, noted that whereas in the past financial crisis built-up over years, they now spread around the world “in the course of half days”.
For Greece – facing a crisis over its perilous public finances - it has certainly been a roller-coaster week. The financial market reaction to its credit downgrade by Fitch has forced an about-turn (of sorts) by the government in Athens, which now plans on Monday to say how it will reduce the deficit from 12.7 per cent to 3 per cent of GDP in coming years.
My expectation, however, is that the Greek story (as in classical literature) will have many twists and turns. Given its record, scepticism is in order when it comes to Athens’ pledges of future fiscal discipline. It is not clear that the government is yet prepared to take remedial action on the scale we’ve seen in Ireland (which is getting a lot of attention in Greece, I hear). The processes underway in Brussels to force Greece back within EU fiscal rules will be slow-moving.
But there is good news for EU policymakers. First, market mechanisms are working. A big handicap prior to the collapse of Lehman Brothers was that eurozone countries such as Greece could get away with bad policies for too long. Second, talk of a general threat to the eurozone has subsided. Most (sensible) analysts agree that exiting Europe’s monetary union is not an option for Greece.
True, Greece’s plight has weakened the euro, which has ended this week back down at levels last seen in early November. A weaker euro, however, will help boost eurozone growth – and thus come as a relief to eurozone policymakers. A little instability is not necessarily all bad.