With both Greek and German ten-year bond yields the highest they have been in well over a decade markets are showing alarm that last weeks joint EU/IMF bailout agreement for the debt ridden economy of Greece is far less than satisfactory. So it probably is, merely an unsigned holding document that sceptics argue will at best put off the problem for maybe another year. A cure to the economic problems in Greece can only be achieved by the Greek government itself. As far as the EU and IMF are concerned all that they can do is to keep the patient alive on life support. Nevertheless, the manner in which the Greek bail out ‘deal’ was cobbled together and at various stages communicated shows just how ill prepared and inexperienced the various European authorities involved are. For Germany as the principle supporting Euro member economy involved and the one with possibly the most to lose it seems that lacking sufficient belief that the Greek government let alone the population of the southern European state comprehends the seriousness of the mess and of what is required is sufficient reason for the engine of the EU economy to voice more discontent. But does the problem in Greece go even wider than this? No, I am not referring here to the potential of Portugal, Spain or even the UK following Greece into a similar range of problems, something that I do not actually believe will at any rate occur. But with international credit markets watch the Greek mess seemingly spiralling out of control my concern is that market confidence in the overall controlling system in the EU is also now fast being lost. Is Greece then a warning of an even wider problem emerging for markets? Is this a case of not only watch out the Euro, watch out the ECB but maybe also, a wake up call for the EU as well?
Led by German government discontent that Greece has yet to get the message the German Chancellor is in essence speaking for markets when she implies that the current solution has too many lose ends. There is of course a political element in the complaints as well. Still, the damage that the current unsatisfactory situation is doing to credit markets across right Europe cannot be underestimated. Indeed, not only has confidence in the future of the Euro currency been shaken but there are also increasing signs that the European Union has been damaged as well. Despite the rules put in place that neither the EU nor the European Central Bank are actually responsible for the reckless spending attitude of the Greek government should not allow guilt to be removed by the subsequent failure to act to halt the spiralling out of control deficit and debt situation sooner. Neither does what is currently being proposed to alleviate damage and blame from the same authorities to act decisively enough and that might have alleviated collateral damage. So, not only has Greece failed the rest of us it is also the ECB which is after all charged with currency responsibility and all matters of financial market stability plus the other overall arbiter of the rules, the EU that has failed too.
We may hope that playing the Greek card now for all that it appears to be worth does not backfire on German Chancellor Angela Merkel and indeed, for other Euro member states and those in the wider EU as well. That begs the question whether Mrs Merkel knows exactly what she is doing by continually throwing her toys out of the pram on this issue in terms of other collateral damage being done to the EU and to the Euro? Strategically few can argue that Mrs. Merkel is right to bang a drum of discontent to ensure that the Greek government and its people get the message. There is after all absolutely no option but for Greece to tighten its economic belt and attempt to balance its books. Greece must get its house in order and that means that despite what has already been done or planned to do it must redouble the effort meaning that all those involved in this unfolding economic tragedy will need to take personal and national pain in abundance over the next three years. The hope will be that by then the Greek government may better match spending to available tax receipts.
To achieve this turnaround means nothing short of a complete economic change revolution that will translate to huge drop in the standard of living of Greeks. But from a tactical and indeed, political standpoint by laying so hard into Greece, by showing the amount of mistrust that she has in her fellow EU and Eurozone area members even whilst understandably failing to believe that the Greek government has yet got the message what worries me now is that Chancellor Merkel may by default be sowing seeds of dissent that at some point could well seriously damage the future prospect of the Euro. Suffice to say that inadvertently or not Mrs Merkel has inadvertently damaged how the rest of the world sees the Euro currency and indeed, the EU. This plays into the hands of Euro sceptics of course but however understandable the current position of Germany may be from being one of the principle risk bearers Chancellor Merkel should take great care from now on not to extend the credibility damage and mistrust already suffered.
Alienating Germany is one thing and maybe also praying that Greece might walk away from the Euro and throw itself at the mercy of the IMF quite another. The time now though is not right for either. Tongues of discontent are already wagging and however bad the situation of the finances of one member state may be both the EU and particularly the Eurozone area has no choice but stand together on this one. Mrs. Merkel is thus entitled to throw her toys out of the pram insisting that the bail out plan for Greece must be accompanied by rigid internal action by the domestic authorities to bring its deficit down but in doing so the German Chancellor must take great care not to further damage the credibility of the EU and it main area currency.
