Greece Crisis, Euro and Political Integration

Greece Crisis, Euro and Political Integration

Introduction

In November of 2009, the Greek government of George Papandreou revised its budget deficit as percent of GDP from an estimated 6% to 13.6%, market began to panic. The Greece government announced if they cannot get rescue loan before May, the Greece government will not be able to refinance for 20 billion euros matured government debt. On worries of a total number of 300 billion to 4,000 billion U.S. dollars Greece government bond defaults, investors began to sell Greece government bonds on a large scale, which made Greece government facing difficulty to roll over the matured bond (Petrakis, 2010). Moreover, because Greece is the member of European economic and monetary union (EMU) and Euro is Greece’s currency, it cannot print and depreciate its currency as some other countries to go through the crisis. Greece sovereign debt crisis finally broke out. The Greece sovereign debt crisis lit the unstable tinder of more countries’ sovereign debt crisis such as Ireland, Portugal, Spain and Italy, and also produced the hot argument about whether EMU needs political integration to avoid these problems.

Advantages of Political Integration

The relationship between monetary union and political integration should refer to the fundamental principle of monetary union and the root cause of this Greece sovereign debt crisis. The EMU is an agreement among sixteen countries which have approved and authorized euro as single currency between them. Therefore the member nations, like Greece, surrender sovereignty of their monetary policy and exchange rate policy when they joined the euro. However, member states could still reserve the control of their fiscal policy, such as government taxation and expenditure for macroeconomic control and adjustment (Moffett, Stonehill, & Eiteman, 2009). One of the root causes of Greece debt crisis was the incoordination between EMU’s monetary policy and Greece’s fiscal policy. In...