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Sarkozy, Merkel reach deal on Greece bailout cash

Germany and France reached an agreement that should see a desperately needed Greece bailout move forward.

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Moody’s, a credit rating agency, has warned it could downgrade its ratings for three major French banks exposed to Greek debt. German banks are also substantially exposed. Germany has taken a tough stand, asking for private investors to share debt risk -- while the European Central Bank has opted for a voluntary repurchase of Greek bonds.

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Some analysts argue that Germany wanted to push Greece to the brink to drive home what Athens needs to do to reduce its budget deficit – such as eliminating dense layers of corruption and nepotism, which Papandreou has been surprisingly forthright about.

'Poisoning European politics'

The effect of the crisis is not restricted to Greece, the underbelly of the Balkans, which often seems a world away from Brussels. The crisis strains European relations and ideals. Some analysts describe a recent “cold war” between the European Central Bank and Germany. While the eurozone isn't going to break, it can suffer real harm, analysts say.

“This is a huge problem for Europe, and at the moment, it is poisoning European politics,” says Philip Whyte of the Center for European Reform in London. “It exacerbates tensions between the north and south [of Europe]. It creates divides between politicians and their electorates. And the whole mess is bringing another rise of Euro-skepticism.”

A key tension is over perceptions. In the wealthier north – Netherlands, Germany, Finland – new populist parties describe the south as feckless and freeloading. In the debtor “peripheral” nations – Greece, Italy, Spain, Ireland – budgets have been cut deeply and governments have fallen.

(Recent OECD figures show Germans working fewer hours than Greeks. Germans work 1,390 hours annually, while Greeks average 2,119 hours, Italians 1,773 hours, Portuguese 1,719, and Spanish 1,654 – according to a study by French investment group Natixis.)

Protests in Athens against austerity June 9 were fueled by Greeks from a range of persuasions – socialist left, nationalist right, and unions. They were given heft by a nonaligned and peaceful movement of “indignants” – young people who don’t want to hear that European elites can’t find a way out.

“This is the strangest situation ever,” says Rym Ayadi, senior economist at the Center for European Policy Studies. “A default is not a one-off. You weigh the cost of bailing out, and the cost of not bailing out. ... But no current plans seem built to deal with the long term problem.”

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