Giselle Roux - ABC's '7:30 Report'


LEIGH SALES, PRESENTER: The election triumph in Greece of an anti-austerity party has sent shockwaves across Europe and just at the wrong time. The European Central Bank has launched a trillion-dollar stimulus program to reassure the wider world that Europe is dealing with its problems - that is, little or no economic growth and shocking levels of youth unemployment. But the Athens result is destabilising the plan, as Neal Woolrich reports.

NEAL WOOLRICH, REPORTER: This is what it takes a fix a modern economy, or so the central bankers would have us believe. Late last week, Mario Draghi, the president of the European Central Bank, announced the ECB would pump money into the economies of each of its countries. €60 billion a month and $1.4 trillion in total will be splurged buying bonds at the stroke of a keyboard.

The idea is that sellers will find themselves flush with funds to spend, businesses will grow, employment will bloom. It used to be called money printing. Nowadays, it goes by the seemingly more respectable name of quantitative easing.

GISELLE ROUX, CIO, ESCALA PARTNERS: It's far from a magic bullet. You need other factors to work for you.

MARCUS PADLEY, STOCKBROKER: It's just another money-printing exercise designed to delay the inevitable, which is a weakening economy in Europe.

NEAL WOOLRICH: After six years of lacklustre growth and rising unemployment, quantitative easing is Europe's bid to avoid a similar fate to Japan, which has been stuck in an economic rut for more than two decades.

Germany remains opposed, arguing that economic reform is the path to prosperity, fearful that it may be again called on to bail out its weaker neighbours.

But the ECB is hoping QE will devalue the exchange rate to make European exporters more competitive and boost inflation, something which Europe's deeply-indebted governments and consumers desperately need to erode the value of their borrowings.

DAVID DE GARIS, SENIOR ECONOMIST, NAB: There's more an issue of deflation at the present time, that is, persistent and ongoing falls in prices. So, the decline in oil prices, I think they're tending to look through that right now, but he wants to get over the deflation risk from a very weak eurozone economy now.

NEAL WOOLRICH: However, the boost in confidence from the ECB's announcement was short-lived, thanks to the upset victory of Greece's far-left Syriza party in its general election. Riding a wave of anti-austerity sentiment, Syriza wants to increase pensions and wages, stop the sale of public assets and renegotiate Greece's $450 billion in loans.

MARCUS PADLEY: It clearly doesn't help for Greece to change their player and he walks into the changing room and said, "All you guys I owe money to, I'm not going to pay back."

NEAL WOOLRICH: Greece's government debt now stands at a whopping 175 per cent of GDP and its economy has shrunk by nearly a third in five years. Its new leaders, though, are trying to stay upbeat.

The man with his hands on the purse strings is economist Yanis Varoufakis, a dual Australian citizen who taught at Sydney University for a decade.

YANIS VAROUFAKIS, GREEK FINANCE MINISTER: Bargaining is a big game and we're about to begin negotiating with our partners, and deliberating, actually.

NEAL WOOLRICH: These days, he's known as Dr Doom after arguing Greece should default on its debts.

YANIS VAROUFAKIS: It is a great challenge. But the challenge is how to minimise social costs that were unnecessary throughout Europe. Thank you.

NEAL WOOLRICH: Two of the key stakeholders in the Greek bailout, the International Monetary Fund and the ECB, are publicly making diplomatic overtures to the Greek Government. But the carrot comes with a stick. The ECB is threatening to leave Greece outside the European lifeboat if it reneges on its debts.

The significance of Greece for Europe's leaders is that Syriza's win may embolden anti-austerity movements in bigger economies, where youth unemployment nearly 50 per cent is tearing societies apart.

GISELLE ROUX: We do have Spanish and Portuguese elections coming up this year. They would certainly be expecting to buy debt from those countries, and if there's any sense that there is a similar push to - trying to unravel that landscape that took so much time to set in in 2011, that could be a little bit more problematic.

DAVID DE GARIS: Greece needs financial stability. The Europeans need Greece to stay in the euro. So there's going to be some very interesting negotiations there. But so far, it hasn't - we haven't seen what we might call financial contagion, in other words, spillover into other parts of eurozone financial markets.

NEAL WOOLRICH: In Spain, the anti-austerity Podemos Party, formed just over a year ago is now leading in the polls and looks set to crack apart the nation's two-party system.

PABLO IGLESIAS, PODEMOS LEADER: We are very happy because the political force of change has win the elections in Greece. Now we are going to support the government of change in Greece, but we have to do our own duty in Spain. Nobody's going to do our homework for us.

NEAL WOOLRICH: And as the public backlash against austerity grows, even some of the economic hardheads in Brussels concede it's time for a rethink.

GISELLE ROUX: There will be those I think that will start to argue that the extreme austerity has possibly been - is now less helpful than what it was back in - two, three years ago, unless you took very extreme view and moved on. You know, maybe a little bit of fiscal latitude is possibly not a bad thing for Europe at this time.

NEAL WOOLRICH: Even without the looming Greek showdown, there are questions over whether Europe's quantitative easing gamble will pay off. The US Federal Reserve embarked on quantitative easing in 2008 at the depths of the Global Financial Crisis, eventually pumping almost $4 trillion into its economy.

GISELLE ROUX: You can argue that low interest rates certainly worked for them, but there were a lot of other dynamics working for the US as well, not least that at least for a period they had quite a big energy boom and so on. But it doesn't encourage lending, for example. It doesn't - you don't see lending growth just because you've got low interest rates.

NEAL WOOLRICH: Many credit the Fed's unprecedented intervention for helping put the US economy back on the road to recovery. But others argue the effect of quantitative easing has been mostly felt in asset markets, pumping up the prices of shares, bonds and property, and has done little for the real economy, instead potentially sowing the seeds for the next crisis.

MARCUS PADLEY: It was fantastic for the investment bankers, but not terribly fantastic for the economy and you're going to get prices going up of equities, but the economy not following along behind, so you get a market that's going to be more expensive and that essentially is an asset bubble building.

NEAL WOOLRICH: Another risk that Mario Draghi and the ECB will need to manage if they are to pull the European economy back from the brink.

LEIGH SALES: Neal Woolrich reporting.