Greece’s Economy Threatens Euro’s Stability

Greece’s Economy Threatens Euro’s Stability

The newly elected government of socialist Prime Minister George Papandreou faces massive pressure from EU member states to tackle its budget deficit and growing public debt. Brussels fears that the Greek economy's continued slide could create a contagion effect across the eurozone and pose a threat to the stability of the common currency.

"The Greek example is putting us under great, great pressures," German Chancellor Angela Merkel said recently, setting aside her usual diplomatic tone. "The euro is in a very difficult phase for the coming years," she added.

The euro rests on the Stability and Growth Pact adopted in 1997, by which the signatory countries agreed to enforce strict fiscal policies, including limiting budget deficits to 3 percent of GDP and public debt to 60 percent of GDP. Despite some skepticism regarding the sustainability of such a monetary arrangement, the euro performed remarkably well during its early years.

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