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Greece bailout: What's the future of the euro?

The Greece bailout package agreed to by European leaders and the International Monetary Fund last week decreases the likelihood of a Greek government default. But the wrangling over the bailout -- and the steps that left Greece in a financial hole -- raise questions about the prospects for the stability of the euro.

By Correspondent / March 28, 2010

A statue which depicts a woman holding up the symbol of the euro is seen at the European Parliament in Brussels, March 18. In the biggest crisis the Euro has seen since its introduction ten years ago, leaders decided to take action on the Greece bailout to protect the credibility of the Euro.

Virginia Mayo/AP/File

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London

Faced with the gravest crisis yet in the history of the decade-old euro, European Union leaders met in Brussels last week to thrash out how to protect the currency’s Achilles’ heel: Greece.

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By summit’s end, the 15 eurozone countries (other than Greece) and the International Monetary Fund (IMF) had agreed to a package of loans that may head off a crisis for now. While no figures were announced formally for the Greece bailout, officials said the amount available could total €22 billion ($29 billion). The money would be made available if Greece ends up facing default. The promise of availability will now, the country's involved hope, act as a buffer for market confidence in Greece and make it easier for the country to raise money on the open market.

Despite the agreement, Greece’s debt, far larger than eurozone rules allow, is likely to remain a source of anxiety for the currency for some time.

Why are the woes of the Greek economy so linked to the health of the euro?

Greece has long lived beyond its means while concealing a ballooning deficit. Greece must refinance much of its €300 billion ($419 billion) debt by the end of May or risk default. A default would blow a hole in the credibility of the eurozone. “If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise, there was no point in creating the euro,” warned French President Nicolas Sarkozy.

But the rules of the euro prohibit bailouts of the kind Greece may yet need. EU leaders sought last week to craft a bailout by another name that would circumvent those rules through provision of bilateral loans.

Why has the possibility of an intervention by the IMF been raised?

The eurozone’s dominant member, Germany, had stubbornly refused to endorse a Greek rescue package, insisting that Greece must get its own house in order through austerity measures. Berlin, seeking to limit its own responsibility for Greece’s problems, has argued for IMF involvement despite misgivings by France.

Germany’s chancellor, Angela Merkel, said March 15 that European governments should only help Greece when it is “at the brink of bankruptcy, which it luckily is not at the moment.” If aid was required, “the IMF is a topic we need to look at,” she insisted.

IMF involvement may be positive for Greece, since it’s likely to lend at lower interest rates than the European powers. Despite Greek promises to cut government spending to reduce a budget deficit of 12.7 percent of gross domestic product (GDP), a backlash from Greek unions has raised questions over follow-through.

Why is Germany so reluctant to lead a bailout of Greece?

After years of saving, increasing productivity, and debt control, Germany is leery of helping a country that has done exactly the opposite. Almost one-third of Germans believe Greece should be asked to leave the eurozone, while some 40 percent think Europe’s biggest economy would be better off outside the single currency, according to a Financial Times poll.

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