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After eight long years of crisis whereby Greece endured stringent budget austerity programs, the country’s bailout will finally come to an end. Greece will therefore have to finance itself by borrowing on international bond markets.
Before the bailout Greece was battling massive debt, loss of investment and huge unemployment. Nearly €300bn were provided in “emergency loans” in three consecutive bailout packages. A long period of austerity helped Greece to avoid Grexit and started to grow again.
Even though the exit is a big positive “milestone”, Greece is going to remain under enhanced surveillance given the unpopular amount of the bailout.
Government Gross Debt as a % of GDP
Source: International Monetary Fund, World Economic Outlook
There are hopes that Greece might be a “success story” just like Portugal, Spain, Ireland, and Cyprus but the debt problems in Europe are far from solved. A huge debt in Greece and Italy will remain the lurking financial threat to Europe.
Net ECB Lending (Greece, Ireland, Italy, Portugal and Spain)
Source: Bloomberg Terminal
Aside from debt problems, the European Union is also facing other key challenges:
Anti-austerity Government in Italy
The debt problem in Italy has now turned into a political one. The rise in anti-austerity government is a political crisis that calls into question the survival and stability of the European Union and its shared currency. It shows that the Eurozone problems had not be laid to rest.
Brexit had elevated fears that other countries might follow the same step which is a crucial threat to the bloc. The recent elections within Europe had revealed a rise in European populist parties. This created a situation that feeds fears that all is not well in the Euro.
The EU’s divided union prevents the EU to act in unison to fight the US on trade-related matters. A wobbly European market due to the current trade risks coupled with geopolitical risks are constant threats for the common currency as European members with a fragile economy will suffer.
Investors are indecisive on whether to return which might explain Europe eagerness to paint Greece as a “comeback story”. Greece’s bailout coming to an end is good but it still has a long way to go. Debt problems in Europe remain a big threat and the political situation in Italy is an even bigger issue than Brexit.
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