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a euro crisis? « Previous | |Next »
September 13, 2011

The Euro crisis appears to be getting worse, not better.

Greece appears close to default as the interest rate on two-year Greek bonds have now climbed above 85 per cent. The market's focus has shifted to the debts of the German and French banks. Germany has adopted bailout fatigue as official policy and the politics of the eurozone crisis are largely determined in Germany.

That politics currently means that Greece will not get any more money lifelines (bailout cash) until they shape up---that is comply with Germany’s austerity dictates, and get their budget deficit under control. This politics is a strategy to defend the French and German banks, because they would be the major causalities of a Greek default. Germany and France continue to insist that Athens stick to the tough deficit-reduction programme, that is taking Greece ever deeper into recession; whilst preparing for a default.

Paul Krugman in his An Impeccable Disaster in the New York Times says that the euro is now at risk of collapse:

Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.

He adds that all the indications are that European leaders are unwilling even to acknowledge the nature of that threat, let alone deal with it effectively.

Their political strategy is still one of austerity--not letting the peripheral countries off the hook for their fiscal sins. Instead of the monetary union requiring political union---a United States of Europe--- the Germans are forcing harsh economic medicine down the throats of the reluctant Greeks, Irish, Portuguese and Spanish electorates. The European Central Bank (ECB) has acted exclusively in the interests of big finance--- to prevent the banks from losing money on their poor investments. This has made it impossible for Greece to narrow its deficits by boosting growth.

The end game is now approaching. The default events now appear inevitable. Without the next €8bn tranche of the bailout at the end of the month Athens will be unable to meet repayments due on its bonds. It's currently not doing enough over job cuts in the civil service and the privatisation of €50bn-worth of state assets. Then Greece faces another progress check in December. Greece will default, it's just a matter of time, as its economy is shrinking.

That means the shaky German and French banks are in the firing line and the subsequent collateral damage will need to be contained--ie., the banks are shored up through a government-backed injection of capital in banks. A Greek default would have dire knock-on effects for banks in Germany, France and the UK that are presently holding billions in Greek debt.

Since the EU banking system is undercapitalized whatever capital is left in the coffers is quickly sucked down the plughole once the Greek, Portuguese, Irish, Italian and Spanish government bonds are written down to market values. Many of the banks could face excruciating restructuring or, perhaps, bankruptcy.

The commentary from the economists of finance capital in Europe is one of doom and gloom: a Greek default would be a financial and economic disaster not only for Greece, but also for 16 continuing euro area member states, and that it would also have severe economic and political implications for the whole of the EU and the wider global economy.

| Posted by Gary Sauer-Thompson at 10:27 AM |