Thursday, November 3, 2011

Update on Greece and Europe

The situation in Europe is changing quickly today.  In the aftermath of yesterday's meeting with European leaders, Greece has now moved up the date of the proposed referendum on the bailout package to December 4.  As discussed in a post yesterday, the original date in January didn't make sense since Greece needs part of the bailout in December and, without agreeing to the plan, it probably wouldn't receive any funds.  However, it now appears that the Greek government is may fall, leading to new elections.  If this takes place, there won't be a referendum and things will be on hold until a new government is put in place.  Depending on who runs the next government, new negotiations may need to take place to revise the proposed bailout.

Meanwhile, there is increasing evidence that the eurozone economy is slowing down with more countries probably entering a recession.  In response, the European Central Bank (ECB) made a surprise cut in its benchmark interest rate.  This was the first meeting under the new chair, Mario Draghi, and may reflect a more balanced approach to monetary policy than that under his predecessor, Jean-Claude Trichet.  Whereas Trichet was rigid in his interpretation of the ECB's inflation mandate (keeping inflation close to 2%), Draghi appears to have a more flexible interpretation of the inflation mandate.  I will discuss the differences and how it relates to the Fed's approach to monetary policy in a future post.  In practical terms, the ECB is likely to implement more stimulus in the future as it tries to limit any downturn in the economy of the eurozone while also keeping inflation under control.

update: Greece has scrapped the referendum after the Prime Minister obtained the backing of the opposition party for the bailout proposal.  Next up is a vote of confidence in the government on Friday.