Assessing the Risks from Russia, Greece and the European Central Bank

In recent months, fi nancial markets have become more anxious about several key developments in Europe. First, there are increased worries that political change in Greece could lead it to renegotiate the terms of its bailout agreement, and in a worst case scenario, exit the euro area. The latter outcome could revive the eurozone fi nancial crisis, as markets would bet on who is next. Second, there are worries about the fallout of a deep recession in Russia, which seems inevitable due to the precipitous drop in oil prices and the pain from economic sanctions. The concern is that Russia’s woes could have repercussions for other nations through trade and fi nancial linkages. These risks compound the challenges for the European Central Bank (ECB). Economic growth in the eurozone remains very weak, and the economy has now fallen into defl ation. While there are widespread expectations that the ECB will embark upon greater monetary stimulus, there are severe political limitations on the central bank that could check its capacity to boost growth and infl ation. In other words, quantitative easing by the ECB may ASSESSING THE RISKS FROM RUSSIA, GREECE AND THE EUROPEAN CENTRAL BANK