Greece’s Leader’s Canny Political Move May Be the Beginning of the End of the European Union

It Didn’t Have to Be This way – But It Is

The problem with Europe and Greece can be easily described.  Here is the situation.

1. Greece has borrowed money for years from domestic and other European banks to finance its budget deficit.

2. Greece does not have the funds to repay the loans.

3. The European Union, the International Monetary Fund and the European Central Bank (the EU, the IMF, and the ECB) have agreed to lend Greece the money to pay its debt and finance its deficit.

4. In return Greece has agreed to raise taxes, cut government spending and engage in a massive austerity plan.

5. The austerity plan has created austerity, and caused a major recession in Greece, leading to even higher steps 2, 3 and 4 above.

Greece has had enough.  The Prime Minister has said that he will put the next step of the program to a vote by the people.  This is likely to topple the government, and make it impossible for Greece to agree to the new plan.  Notice though, that the Greek government has not rejected the European plan, it has just said it will put it to a vote. 

Since no one expects anyone to actually vote to accept the plan, the move has the result of rejecting Europe’s bailout conditions without actually rejecting them.  This leaves the Greek political governing establishment able to say “we tried, it was just not politically possible, don’t blame us.”

And yes, your memory is correct.  It was less than one week ago that markets and governments were celebrating an end to the crisis and a solution to the problem, one in which those banks hold the Greek debt saw a 50% reduction in its principal amount.  Now

The next step is a vote of no-confidence by the Greek legislature, which should topple the government.  The step after that  . . .

The chairman of the euro zone finance ministers, Jean-Claude Juncker, warned that the plan to hold a referendum endangered an $11 billion loan that Greece was to receive under the bailout deal, and that Greece urgently needed to avoid a default. Mr. Juncker, who is also the prime minister of Luxembourg, added that Greece could face bankruptcy if it votes “no” on the bailout deal.

Bankruptcy means default, and default means the insurance issued on Greek debt, called CDS’s will come due and all this probably means a recession in Europe at least as large as the one they just suffered.  And it could be worse.

The big fear is that a decisive turn against the bailout package in Greece could undermine European efforts to enforce deep budget cuts in other heavily indebted European countries, especially Italy, which is mired in its own political crisis and has a far larger economy and much more debt than Greece.

Yep, that would be worse.