Greek debt crisis: Bailout likely, but will it be enough?
The Greek debt crisis continued to roil European debt markets on Wednesday after a leading rating agency cut the country's debt status to junk. While short term aid to Greece is a near certainty, economists warn that more international cash – and painful political steps in Athens – will be needed.
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This wasn't supposed to happen when the euro, the common currency for much of Europe, was introduced in 1998 (Greece joined in 2000). Unlike Egypt or Colombia, which can print money in times of financial crisis, undermining the value of both their domestic currencies and ability to repay foreign debts, euro membership was supposed to come with a stable currency that would make repayment easier.Skip to next paragraph
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It also came with strict rules on government borrowing that would prevent any need for a bailout. The Maastricht Treaty that established the currency union even came with an ironclad promise of no inter-European bailouts, easing fears of members like Germany that they would be asked to pony up for more profligate euro members.
In reality, currency union has tied European financial boats together as never before – even as Greece, for example, has pursued radically more costly fiscal policies than, say, Germany. While in practice other eurozone nations could refuse to bail out Greece, the fate of the common currency is tied to the country, and arguments similar to the "too big to fail" discussions that led to US bank bailouts are coming to a fore.
Financial union without political union has long been the major flaw in the common currency to critics, and one that is feeding euroskepticism, particularly in Germany, where many long for the vanished and stable deutschemark.
"The would-be members of the euro club are not like railroad cars just coasting along or waiting passively in the Brussels switching yard," German author and political scientist Josef Joffe warned in a piece for the New York Review of Books in 1997, on the eve of monetary union. "Each has its own 'engineer' – its government whose politicians face reelection. Each has its own 'engine' – its macroeconomic policy that determines spending and taxing, debt and interest."
Mr. Joffe argued that political differences on domestic economic policy would almost inevitably lead to a "decoupling" of euro economies, and create strains like the ones we are seeing today.
The Germans will play a crucial role in any bailout of Greece. The wealthiest member of the eurozone, Germany will be expected to kick in the lion's share of the cash for Greece, something that is upsetting many German voters and politicians, who ask why they should have to pay the price for a southern European neighbor that has stubbornly refused to get its financial house in order.
Some German politicians have also been calling for "haircuts" on Greek debt – a reduction in the amount of money owed that would make the bailout cheaper for the governments involved and increase the chances Greece could get back on its feet. The private sector hates the idea – it amounts to a kind of limited default – and concerns about debt reductions have also weighed on European debt markets.