Posted on 05 October 2011 with 4 comments from readers
German Chancellor Angela Merkel yesterday defied her ‘entire council’ of economic advisers who want to see the Greek debt resturctured in an orderly fashion, telling a meeting of her party members in Magdeburg: ‘Whoever believes that has no clue about the economy’.
This stubborn and some would say ignorant stance in front of the economic reality that is a bankrupt Greece is appalling. It leaves the eurozone in the hands of the financial markets that will therefore have to resolve the Greek debt crisis in their own manner.
Mrs Merkel shows every sign of grasping the severity of the problem and the dilemma it poses. It is true that letting Greece off the hook has disadvantages: ‘If we tell a country ‘We cancel half of your debt,’ that’s a great deal. Then the next guy will immediately show up and say he wants the same.’
But then again she noted that a Greek default would bring unpredictable consequences, lead to speculative attacks on other eurozone countries and cause a recession in Germany. Plus a Greek default would trigger ‘a gigantic loss of confidence’ in eurozone bonds.
Yes that is the dilemma: you are damned if you do allow a Greek default. But you are also damned if you do not because it is going to happen anyway. The country is bankrupt, it cannot pay its public sector staff let alone interest on its huge debts without money from the EU and the eurozone is not going to throw good money after bad forever. Besides the financial markets are running out of patience with this charade.
Can European ’solidarity’ beat the markets and preserve the financial solvency of the eurozone? It seems it is the German Chancellor who has ‘no clue’ about how economies function in the modern world. Perhaps it is her communist background from Eastern Germany and a lack of experience with capitalism.
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For an unresolved crisis will result in higher and higher interest rates for eurozone bonds, and a total paralysis of inter-bank lending. Stock markets will crash and become highly volatile. The value of the euro will slump but not help trade because trade finance will freeze up.
The German Chancellor says ‘No one can say with certainty’ what happens if Greece defaults. ‘Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing?’
She does not seem to understand that time is running out. The only choice is between managing a Greek default as best possible or leaving it to the markets to resolve. The third option of preventing it entirely just is not possible. This can cannot be kicked down the road any longer.