Can this marriage be saved? Greece and the euro

The Greek government has been in talks this past weekend with the major players in the European financial community who will determine whether Greece experiences a sovereign default next month or continues to limp along - the new "Sick Man" of Europe.

No one is optimistic.

The reason? New York Times:

The Greeks face an October deadline to qualify for 8 billion euros, or $11 billion, in aid, without which Greece will certainly default on its growing debt. Over the weekend, European finance ministers issued stern warnings at a meeting in Poland that failure to meet financial targets would imperil the release of the payment.

The payment is just one installment in a larger package of 110 billion euros, or $152.6 billion, in aid agreed to by euro zone members in spring 2010; a second bailout fund, for 109 billion euros, or $150.2 billion, was agreed to in July, though that has yet to be ratified.

To reach the financial targets, Greek leaders discussed a range of draconian layoffs and pay reductions among public sector workers. While these measures have long been planned, but never carried out, to the frustration of foreign lenders, the discussion of these cuts represented a marked change in approach for the Greek government, with the emphasis on reductions over revenue increases.

"Everyone wants a smaller state," the finance minister, Evangelos Venizelos, said on Sunday.

After the meeting, the Greek government reaffirmed its commitment to hit budget targets for 2011 and 2012, to avoid generating new debt and to revamp the dysfunctional economy. The measures are "in order to avoid bankruptcy and remain in the euro zone but also to stop the country being blackmailed and humiliated," Mr. Venizelos said.

First of all, it is whistling past the graveyard for the finance minister to suggest that "everyone wants a smaller state." If that were true, Greeks wouldn't be rioting in the streets over the paltry "reforms" made by the government so far.

Secondly, "blackmail" and "humiliation" are queer concepts when you consider that the Greek government is getting this bailout at the expense of their richer neighbors and are demanding that business not go on as usual. Germany and France will not subsidize the one million Greek government workers and their extra generous bennies and pay packages.

Third, there is this:

More specifically, Greece officials are being pressed to put thousands of civil servants deemed to be "surplus" on a standby status at a reduced wage. The government has not yet pushed ahead with this measure, which is very unpopular in a country where nearly one million people out of a population of 11 million work for the government.

In other words, Greek unions might riot in the streets because they are going to reduce the pay of people who don't work anyway.

Hopeless.

Germany is putting its foot down, refusing to release the next bailout increment unless the Greeks bite the bullet and reduce the size of government. Analysis aren't sure how serious the Germans are in this threat simply because an unmanaged default by Greece would start a chain reaction that, as one observer notes, "The markets would start attacking Portugal and Ireland, and the domino would stop somewhere around France."That domino would knock over economic giants Italy and Spain before washing up in the Riviera. And there isn't a big enough printing press in all of Europe that could print enough euros to save the continent an economic disaster.

Very quietly, the Federal Reserve is lining up as a last resort backstop that the Europeans can tap if the crisis spirals out of control. There really isn't a realistic alternative. If Europe collapses there would be no saving the US economy from the contagion.

The likely short term outcome is that euro lenders will paper over Greek shortcomings in meeting budget targets and give them the money. They will kick the can down the road hoping that something - anything - will change before the next payment is due and Greece will pull back from the brink.

This isn't likely which is why eventually, some concerted action must be taken to address the crisis head on. And the more they delay, the harder the cure is likely to be.