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Posted by on Feb 13, 2010 in Economy, International | 4 comments

Is Greece the New Lehman Brothers?

PIIGS is a new acronym for Portugal, Ireland, Italy, Greece and Spain, which are euro zone members with big budget deficits and other economic problems, that led to market speculation against the euro.  Greece has the biggest economic woes and is at the center of attention, but the market speculation could spread.

The Telegraph accused European leaders of “sparking unease and confusion” on Thursday. The heads of state from the euro zone had pledged “determined and coordinated action” to prevent Greece’s full-blown economic collapse, but did not provide a more concrete plan. Thus initial reaction from the financial markets was negative: Greece’s borrowing costs spiked even further and the euro slid on foreign exchanges, losing nearly 2 cents against the dollar, its lowest level for the last nine months.

According to the New York Times French officials suggested that Greece could be Europe’s Lehman Brothers: “undeserving of help, a potential catalyst for moral hazard elsewhere but simply too critical a link in the chain to be allowed to fail.”

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said that there is a “serious risk” that Greece’s budget problems will make it harder for other EU countries to keep financing their own deficits (M&C). France had been concerned about contagion and pushed for a “firewall” to protect the rest of the euro zone, but Germany strongly opposed any such moves.

Deutsche Welle concludes from a press roundup: “German newspapers reacted cautiously to the EU’s political solidarity with Greece, wary of the potential cost to German taxpayers a bailout could bring. Other papers say inaction carries a far greater risk.”

What do you consider the greater risk here? Bailout or inaction?

Do we need a “firewall” to protect the rest of the euro zone from contagion as French President Sarkozy suggested?

More powers to the European Council? Its new president, Herman Van Rompuy, is using the financial crisis “to launch an audacious grab for power over national budgets,” claims the Independent and cites leaked EU documents.

More powers to Germany? Reuters has learned: “EU diplomats say that in any bailout euro zone states would likely contribute voluntarily based on their economic weight. Europe’s biggest economy would thus become its lender of last resort, setting a precedent that few Germans will relish, even if Berlin gains greater sway over its partners’ budget policies.”

Is the United States to blame for the euro zone’s trouble? A Romanian journalist goes soooo far as to claim on  Europe’s World: “By allowing NY financial traders to viciously attack struggling EU members, the US is putting the transatlantic partnership in jeopardy”

Please share your views in the comment section here or over at Atlantic Community, where I wrote this first.

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  • DLS

    “contribute voluntarily based on their economic weight”

    “Ability to pay” sometimes can be ambiguous — can possess “nuanced” semantics. It’s a good rationalization as well for what else is being sought (such as discipline and casting aside collectivism in this case to rely on Germany’s individual-member reputation alone as a support for the Euro in the markets).

    Ability to pay, or the size of the economy measured not only by GDP but perhaps instead by taxes paid, has been considered before in apportioning seats or votes in government (as was considered for the USA). And, there’s nothing wrong with weighting votes by taxes paid, especially if the taxes are divorced from costs incurred or benefits received, as is the case with ability to pay and especially with progressive taxation. Moreover, the relative sizes of the nations, population- and economy-wise, has often been viewed, as it naturally would be, in a multiple-nation and multi-polar scheme like the EU; the issue of voting power for the different nations in the EU has long been a fascinating subject as well as one of contention in that organization. Don’t be surprised if this bailout motivates additional thought and even action related to this by Germany and the other members of the EU, given this event.


  • DLS

    Note to Senate reformer Don Quixote: Weighting votes based on population (or other measures) is another modification that could be sought in the replacement of the Senate that preserves identity of the states.

  • shannonlee

    Germany will do something to protect the Euro and the EU. It will be interesting to see how Germans will react. Germans in general like the idea of the EU, but they won’t stand for a USA type of no strings attached bailout.

    • mikkel

      What about Spain/Portugal and perhaps eventually Italy?

      It is hard for me to get information from all sides (most commentary is British, and anti EU at that) but this one summary seems to be highly accurate, based on what I’ve read from the top EU officials:

      When the EMU was formed and launched the common currency euro-skeptics argued that the European economy is too diverse to support a stable common currency. Moreover, unless countries agree to unite their fiscal policies and unify their public debts, a currency union will not last. Greece’s situation now proves their point and raises the question: will this lead to a break-up of the EMU? Will Greece be forced out of the EMU and back to the Drachma? If so, this undermines the credibility of the Maastricht Treaty, the soundness of the EMU, the strength of the euro as an emerging reserve currency and questions the soundness of the Euro institutions and reduces Europe’s status as a global economic and political power.

      Krugman has hammered that bold point home as well as the EU president up there. The author predicts that will happen.

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