Howard Wheeldon: Greece – Drama, Crisis, Neither or Both?

With markets having braced themselves to expect Greece to default at anytime now and with a handful that are no doubt still hoping that if the Greek economy implodes this might also bring down the Euro there are not that many happy smiling faces to be found in European dealing rooms today. Those that might wish to see the beginnings of the end of both the Euro and maybe even the EU due to Greece and others embroiled in the European sovereign debt crisis should be careful what they wish for. If the Euro fell then so too would the rest of us warts and all but don't worry, it isn't about to happen. Indeed, the Greek crisis was unlikely in my view to bring down the Euro no matter what and even less likely to bring down the EU. That said, it is surely right to say that unless the Greek economic situation is satisfactorily resolved soon through clear, precise and agreed workable actions laid down by European politicians and the IMF it is clear that this crisis of confidence in markets that has subsequently resulted is powerful enough to leave the Euro in the shadows for a very long time. No matter, where there is life there is hope so they say meaning that on the plus side of all this we should be in little if any doubt that Germany and France are in no mood to let either the Euro or the EU fail now.

Listening to German Chancellor, Angela Merkel at the press conference held this morning with French President Nicolas Sarkozy one senses not so much the word compromise in the air but more likely agreement over inevitability that the EU has no choice but to step up to the second Greek bail-out plate. OK, so nothing concrete came from the 'summit' between the two leaders this morning with regard to the huge problems of Greece except agreement to buy a little more time until more investigations are complete in September. Indeed, watered down though it may, when it comes to using the word 'voluntary' it seems that the German view has not changed that much. In fact it has and the word voluntary may be worth a lot more than it did earlier this morning.

For Angela Merkel to protest that Greek bondholders must share more of the pain is one thing but to achieve that is quite another! So whilst an unsatisfactory impasse remains that could provide dangers to other EU states if the IMF has as reported stepped up to the plate with regard to payment the final EUR12bn of the first agreed tranche of bailout funding to Greece we should all be able to eat next week. Of interest too and rightly so in my view whatever mistakes he has made in the past is that both EU leaders have gone for consistency meaning they are content to back Greek leader, George Papandreou if not through thick and thin but at least through the next difficult political rounds faced.

Meanwhile no one is left in any doubt through the events of this week that Greece is an unholy mess. With strikes and demonstrations continuing and with a batch of new government ministers to contend with and bed in Mr. Papandreou is faced with great odds as he struggles to maintain control of a worsening situation. It is though inconceivable in my view that having come this far that the EU/IMF authorities will fail to come together for a second EUR120bn bail out package for Greece in September. In the meantime I guess that while markets which are after all hugely powerful in this regard will do what they can to wreak further havoc on the bewildering Greek scene they will also decide that it is just not in their interest to press the self destruct button.

Germany can and no doubt probably will continue to throw more wordy toys out of its pram suggesting that Greece must do more to help itself and so must Greek bondholders. But while deep down few would disagree Germany cannot avoid the issue that having acquiesced to the risks that Greece could well bring in when it joined the Euro currency club in January 2002 it can hardly walk away from the problems that Greece ahs subsequently caused EU and Eurozone authorities. Hindsight is a fine thing and easy to say now that if proper levels of homework had been done by Germany which remains the engine of the Eurozone economy perhaps they would have better realised that as Greece relied for well over 70% of GDP on services (in excess of 50% of GDP is accounted by public sector employment) including tourism (15%) that the trade gap was out of line by two-thirds meaning this was a country that needed to buy far more of what it required from abroad the seeds of today's problem was already very apparent. Because of this factor plus others such as bloated public sector inefficiency means that Greece would always be prone to inflation. If Germany and France had used voices of reason and experience they might also have known that fuelled by the prospect of cheaply available loans at rates significantly less than those back in Drachma currency era that at some point the chickens would come home to roost. And so they did – chickens that had that all too guilty look of living beyond our means writ large over them.