Wolfgang Buehler

The European summit in Brussels will shortly be on us, and there are hopes that a solution to the crisis could finally be reached.

If the euro is to stay alive there has to be a change. However a positive outcome from change could be a shakeup of some European institutions which needed to change anyway.

The German Chancellor Angela Merkel says that European leaders will demonstrate strong support for a stable euro at the upcoming EU summit, but solving Europe’s debt crisis and the problems in Greece will take some considerable time.

The situation is particularly tough for Greece. If you look at the Greek economy it is not looking at all healthy. The estimate for economic growth this year is minus 5.3%. Now that’s not surprising, as the IMF, the European Central Bank (ECB), and the European Commission has imposed tough conditions on Greece. As a result private demand will go down, followed by a decrease in GDP. Only part of the blame for this recession can be placed with the Greek government; however the tough austerity measures are causing major economic problems and a huge impact for the Greek people.

The move by the ECB to buy Government bonds of troubled countries in the secondary market, to fight the government debt crises, has inflationary consequences if the liquidity is not taken out of the financial system once the crisis has eased. In any event it looks as if inflation is inevitable as the result of the ECB strategy to defend the euro exchange rates with major countries.

It is crucial to avoid a disorderly default by Greece with a contagion effect that might spill over to the US and Australia.

Even Australia will probably be impacted by the problems in the eurozone. For example if exports to Europe as a whole go down by half that would decrease Australian exports by about 5% because Europe takes about 10% of Australian exports. Plus, we would then have what is called a ‘second order’ effect, whereby China would also see an impact because it exports a huge amount of goods to Europe. Consequently the demand for minerals to Australia would also drop. We’re not out of the woods yet.

Wolfgang Buehler is a Professor of Banking and Finance at the Australian School of Business.