Monday, February 22, 2010

The Debt Crisis in Greece: No Resolution Yet

Germany, France, and the other European Union members have yet to figure out / decide how to address the debt problems in Greece. Approximately $23 billion in loans comes due in April and May, so I anticipate the decision will come no later than the next 2-3 weeks.

In this morning's Post (here), Robert Samuelson has a good summary of why neither choice -- a bailout or no -- is appealing:
A bailout is proving hugely controversial. If Greece is aided, won't other countries demand -- or require -- rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut its government workforce and raise taxes on alcohol, tobacco and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble. To some economists, Greece's situation is so dire that default is inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen existing unemployment, already about 10 percent.
Samuelson cites to economists who think that it is a real possibility that Greece will abandon the euro sometime in the future. Wow, that would be a major development -- and one that would please populists (and nationalists) across Europe, I imagine.

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