Saturday, May 12, 2012

"A chaotic Greek departure should terrify everyone it touches" - The Economist

THE respite in the euro crisis lasted a few short months. Now, despite a €130 billion ($169 billion) second bail-out for Greece, a fiscal compact agreed on by the euro-zone leaders in December, and €1 trillion of cheap long-term loans from the European Central Bank, the night terrors are back. How dispiriting that Europe is still so ill-prepared for the ordeal to come.

Time is short. In France voters have given their new president, François Hollande, a mandate to alter the “austere” course set by his ousted predecessor, Nicolas Sarkozy, and Angela Merkel, Germany’s chancellor, and to focus on growth. Mrs Merkel says she will not change the fiscal compact, but Mr Hollande needs something to show voters in legislative polls next month. More threatening is the second election looming in Greece, where parties are struggling to form a government. If a majority of Greeks again vote to reject the spending cuts and reforms that go with their country’s bail-out, then euro-zone governments—in particular, Germany’s—will face a drastic choice. Mrs Merkel will either accommodate Greece and swallow the moral hazard of rewarding defiance or, more likely, stand firm and cut the Greeks adrift (see article).
The idea of a chaotic Greek departure from the euro at a time of Franco-German disunion should terrify everyone it touches. ...It is worst of all in Greece. The half-truth in Athens is that bigoted northern Europeans give Greeks no credit for the hardship they have borne. Greece really has suffered: between 2007 and 2012 its economy is expected to have shrunk by almost a fifth. The economy is being strangled by a severe credit and liquidity crunch, with more budget cuts and tax rises to come. Even if all goes well, Greece’s debt will be 161% of GDP next year. Whatever the make-up of its next government, the idea that Greece can repay this is the biggest fantasy of all....

Read the rest.

SHOOT: Greece should be written off.  Germany and the healthy Euro-zone economies that remain ought to begin to manage a gradual break up of the eurozone and the single currency.  Or else it will happen as a force of nature, suddenly, catastrophically.

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