The EU's Response

Question 1

Bailouts and how they were done

Answer 1

countries in the EU agreed to bail out other countries (Greece) but they were forced to implement a number of measures to improve their economy, such as austerity

the countries met and discussed whether or not the receiving countries were meeting their targets and modify policies

Question 2

The German Dilemma

Answer 2

whether or not to bail out Greece

if it bails out Greece, other countries will think they can be reckless and get bailed out too (moral hazard)

if it doesn’t,

1. its financial problems may spread (contagion) due to panic
2. Greece could also have to leave the eurozone because it would need its own currency so that it can use its own monetary policies. Other countries may try to do the same, leading to the breakup of the EU
3. German banks have assets that would be negatively affected if Greece defaulted

The solution is to bail Greece out with TOUGH conditions (perhaps it has been too tough)

Germany has been harsher on Greece lately because the risk of contagion is lower and German banks no longer have assets linked to Greece

Question 3

the ECB’s response

Answer 3

at first, they bought government bonds from struggling countries (buying them from other investors) so interest rates and interest rate spreads wouldn’t increase

it then became a lender of last resort to eurozone banks in 2012 through something called the Long Term Refinancing Operation. This made banks more able to lend to households and firms and thus also lowered interest rates

the ECB also made a speech announcing that it would do “whatever it takes” to prevent the breakup of the eurozone. This increased confidence

Then, in 2014, it started quantitative easing, which devalued the euro 🎉 (germany opposed this)

This may have come too late, as by then anti-eu parties started to become popular in many countries

Question 4

Scenario 1

Answer 4

governments are sticking to austerity 🎉
investment rates for such countries(and therefore spreads) are going down
countries are starting to be more relaxed about austerity
economies and banks are rebounding and becoming stronger again (such as ireland)

Question 5

Scenario 2

Answer 5

anti eu parties become popular due to anger over austerity conditions
this can lead to:
Germany relaxing the conditions (moral hazard)
or
Germany remaining tough (contagion, breakup of eurozone). This is what they’re doing at the moment