The Euro in Crisis: Decision Time at the European Central Bank

841 Words Feb 7th, 2015 4 Pages
Concordia University – School of Management
MBA – 506
The Euro in Crisis: Decision Time at the European Central Bank
LaRisha Baker
Professor: Tom DiCorcia
November 30th, 2014

Introduction

The European Central Bank (ECB) is the central bank for Europe's single currency, the euro. Its main task is to maintain the euro's purchasing power and maintain price stability in the euro area. The euro area comprises of 18 European Union (EU) countries, of which Greece is included (European Central Bank, n.d.). As the EBC holds extraordinary decision-making power, this will in effect have an impact on the financial economy of Greece. From this case analysis, the ECB must decide whether to purchase or to not purchase Greek sovereign debt
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Incurred from excessive government wages and infurstructure, e.g… 2004 Athens Olympic structures (Paphitis & Tongas, 2014) * Loss of economy confidence: Fueled by increased debt the Greek government is unable to re-pay (Trumbull, Roscini & Choi, 2011). * Structural European system problems: Countries are required to follow similar fiscal paths, however they do not have treasury to enforce rules. * Trade Imbalances: Because wages were relatively uneven among the EU countries, this made the cost of trade unbalanced.
(Itano, 2010)

Solutions

As noted by Daily Finance, one option to correct the debt crisis would be for the ECB and national Eurosystem central banks to write down the value of Greek government bonds by 30 percent. This process is referred to as a “haircut” (Strupczewski, O'Donnell & Baker, 20112). A 30 percent write down would be equivalent to 70 billion euros, covering the 45 billion euro loan that was requested in 2010 (which subsequently ballooned to an 45 billion euro request).

Other solutions to consider would be: (Altman, 2012) 1. Officially Default on loans: Essentially declaring bankruptcy, which would relieve Greece from paying the interest rates and begin to focus on rebuilding a healthy economy 2. Drop the Euro: Do away with the euro and adopt their previous form of currency the drachma. This would allow more
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