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September 19, 2011
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:
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:
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.
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.
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