Felix Salmon

When Germany bails out Greece

By Felix Salmon
February 9, 2010

Faisal Islam does a great job explaining the problems facing Greece, and why Germany is likely to come up with some kind of bailout:

This so-called ‘ouzo crisis’ has emerged from a witches’ brew of concern about 1 Greece’s shaky political economy, including dodgy statistics and historic default record, 2 the short term nature of Greece’s debts and 3 the fact that a large proportion of its creditors are easily-spooked foreign investors…

It would be a total humiliation if this problem could not be sorted out within the single currency area. Besides, what will the IMF tell Greece to do with its currency, which is controlled by the ECB in Frankfurt? So the IMF is not going to happen.

So all along we have been waiting for the point at which the possible systemic damage, the contagion to the other countries would be so acute, that Germany and France would step in. We are here now.

Will Greece be giving up fiscal independence in return for bailout funds or German guarantees? I’m sure it’ll agree to stringent conditions, while claiming that it would have kept to such a plan in any case. The question is what happens when — inevitably — it ends up breaking its fiscal promises, or trying to play silly games to get around them. What will Germany be able to do, in that case, to snap Greece back into line? And do the Germans really want to play the role of Europe’s fiscal disciplinarian in any event?

It probably doesn’t matter: Greece is the Bear Stearns of Europe, seemingly too big to be allowed to falter or default, and therefore it must be bailed out somehow. Of course this sets an important precedent for when Spain and/or Italy find themselves in a similar situation — and it’s likely to make countries like Latvia feel a bit miffed, seeing how much fiscal pain they’ve inflicted on themselves with no bailout to show for it at all. The hazard here is that countries, seeing the Greek precedent, refuse to take tough fiscal steps unless the path is sweetened by Germany and France. This isn’t the end of the euro crisis: it’s only the beginning.

5 comments so far | RSS Comments RSS

Anyone for a two tier exchange rate Euro? Works for Venezuela. (j/k)

Posted by ottorock | Report as abusive

Note Greece could just default on its debt, or renegotiate it, there’s no reason one can’t do that just because one shares a single currency. So any bailout is not just about Greece, but presumably to bailout the foreign holders of Greek debt, who I imagine are often European banks.

Posted by mjturner | Report as abusive

Why should Germany help and miss the chance having of a depreciating euro?

Posted by SachaSingh | Report as abusive

Think of the Euro Zone as a plane crashing doing loops. Sometimes it’s up and sometimes it’s down, but the trend is downward none the less with a crash at the end.

After WW2 the US spent large sums to rebuild Germany’s infrastructure and factories while others had to go it alone. With new factories and infrastructure the German economy took off and was marveled by all who didn’t realize the free rebuild. Now Germany is in big difficulties. Its population is aging and there is no solution except immigration. Germany has traditionally not been very welcoming to immigrants unless a profit is to be made.

Now Europe is in the death spiral. The few positive indicators are outweighed by the unsolvable problems of population, pollution, private indebtedness and government weakness. This time there will be no US to bail them out. They have sent not only their jobs, but also the blueprints to China.

The future for Europe holds: higher taxes, more controls and regulation, drastic service cuts and falling living standards.

Posted by Reality-Check | Report as abusive

“Greece is the Bear Stearns of Europe, seemingly too big to be allowed to falter or default, and therefore it must be bailed out somehow.”

Ah, Bear Stearns wasn’t bailed out. Nice one. Haha!

Posted by bam | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/