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We shall defend the euro whatever it takes

These are the words of Ollie Rehn, the EU Economic Affairs Commissioner over the weekend after EU finance ministers were involved in eleven hours of talks. The result of the emergency meeting which was brought together to deal with the fiasco in Greece, will have far-reaching implications throughout the eurozone.

The agreement means that the 16 countries in the euro bloc, will be able to draw upon 500 billion euros which is about £430bn. This is made up of 440bn euros in loan guarantees and 60bn euros of additional funding from the European Commission. Added to this the IMF has agreed to make 250bn euros available.

Also, the European Central Bank says that it will make purchases of both government and private debt in the eurozone. This is not the same as the quantitative easing taken up by the Bank of England because the ECB is not allowed by law to buy government bonds direct. They will, therefore have to buy second-hand bonds from banks. The ECB also says that that will try to “ensure depth and liquidity in those market segments which are dysfunctional”, whilst at the same time taking other measures to absorb liquidity elsewhere, so that their basic stance on monetary policy is not changed.

After the previous global credit crisis we are again faced with the issue of moral hazard. Previously it seemed that many banks were regarded as being too big to be allowed to fail with governments moving in to bail them out. Now it would appear that any country in the eurozone will not be allowed to fail, irrespective of the irresponsible way they may have been governed.

Initially, this morning the euro has rallied against the dollar and stock markets have also moved upwards, although this is all a question of confidence, and confidence is a very fragile thing.

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Posted in European Union, eurozone

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