The euro gets a warning shot of Greek fire

January 6, 2010

Juergen Stark , Germany’s ECB executive board member, is well known as a true believer in tight fiscal discipline, so his reported comments in Italy’s Il Sole 24 Ore about not bailing Greece out of its financial difficulties are not out of character. But the market reaction must have at least given pause for thought to EU leaders wondering how far to go in coddling their wayward child.

Within moments of Stark’s reported musings that markets were “deluding themselves” if they thought member states would “put their hands in their wallets to save Greece”, hitting the foreign exchange rooms, the euro was on a tumble.  It hit a low of $1.4285 from a day’s high of $1.4371 — which doesn’t sound like a lot, but is, especially over a very short period of time.

It is true that it recovered very quickly and that other EU notables have hinted that EU member states will indeed bail out Greece if needed (they are unwilling to say so explicitly for fear of taking too much pressure of the Greek government and the Greek public). And it is not really up to the ECB anyway.

But the sharp reaction did underline the concern bubbling beneath the surface that markets have about Europe’s peripherals. A stark reminder, perhaps.

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