Eurozone finance ministers gather in Bucharest on Friday, with Greece at the top of the agenda.
For many years the most troubled member of the single currency, Greece faced a debt nightmare following the 2009 financial crisis. Sharp rises in public sector wages combined with a host of problems resulted in a gaping budget deficit of more than 15pc.
By 2010, the country’s sovereign bonds had been given junk status by credit ratings agencies. The national debt-to-GDP ratio ballooned, from just over 80pc to 182pc.
In 2015, Greek effectively defaulted on repayments to the global lender of last resort, the International Monetary Fund.
There has been a turnaround since then, but only after the pain of three huge bailouts totalling nearly £270bn. These loans also came with strict conditions and have led to severe austerity to get the public finances into order. A third of Greeks live below the poverty line.
Despite the clear human costs, the change in fortunes has been marked. Greek sovereign bond yields rocketed above 37pc in 2012, now they are hovering at around 3.6pc, indicating an appetite has returned for Greek risk. Reports suggest the country may even seek to pay off some loans to the IMF early. The government outdid its requirements to generate a surplus of 3.5pc last year and passed the healthcheck set by eurozone bailout partners.
Greece even managed to dip its toe back in international money markets recently. It has a cash buffer to meet its financing needs for the next couple of years. Having met the restrictions of its bailout set by the rest of the eurozone, it is expected to have €1bn worth of debt relief rubber-stamped on Friday.
However, the hard-won progress seen in the erstwhile problem-child of the currency bloc could suffer a setback if Italy’s financial and political troubles worsen and shake the stability of the single currency.
Lower growth means less room for borrowing – the main trigger for a row between Brussels and Rome which caused market volatility and a widening spread between Italian and German bonds – a negative sign for investor confidence.
Analysts at Goldman Sachs say that “sizeable fiscal tightening may be needed” to avoid a fight between the Italian populist coalition and European partners.
However, a “fiscal contraction has political costs, which the current government coalition may not be willing to pay,” they add.
That’s partly why the second issue on the financial ministers’ list – banking union – is also likely to prove a headache. Figures including Christine Lagarde of the IMF have repeatedly warned that a lack of risk-sharing – such as not having a pan-eurozone deposit insurance scheme – left the bloc vulnerable to economic storms.
Just last week she warned that the bloc’s banks were “not safe enough” from another financial crisis.
Discussion on the banking system will include the issue of non-performing loans. These bad loans are still a hefty share of many members’ banks’ balance sheets. The high levels of government bonds held by these institutions, most particularly in Italy, also makes any political turmoil ramp up pressure on banks’ borrowing costs in an effect known as the “doom loop”.
Without further action to address these bad loans, Berlin is unlikely to sign up to protecting deposits.
Old problems are also likely to be exacerbated by new ones. The outlook for the eurozone economy has worsened considerably in recent months. Italy faced a recession last year, its third in a decade, but Germany – the economic powerhouse of the bloc – has also seen a sharp slowdown.
Minutes from the latest meeting of eurozone central bankers show that concerns are mounting about the wider global economic backdrop and its impact. Demand from China, a key export market for German goods has slowed significantly. Meanwhile trade tensions with the US remain marked, not only between Washington and Beijing, but also between the White House and Brussels, undermining investor confidence.
“President Draghi will have no choice but to give a downbeat assessment of the economic outlook, which will probably set the stage for lower macroeconomic projections in June,” warns Andrew Kenningham of Capital Economics.
The economic slowdown is also having the effect of softer inflation. This means that bets are off for an interest rate hike from the ECB this year. As a result, banks may find it harder to lend to the real economy, as profits are eroded by negative interest rates.
“When market inflation expectations were last at these levels…[it] was one of the factors behind the ECB ramping up quantitative easing [money printing] in 2016,” says Ryan Djajasaputra of Investec.
Greece may have made some headway out of the woods, but the after effects of the financial crisis are still strong. As HSBC said in its quarterly outlook for the area: “With trend growth so low, the reality is that Europe will often be close to recession”. That is a tough reality for its finance ministers to grapple with.