The EU sort of rescued Greece, now Greece sort of defaults. Portugal, Spain, and Italy are not that far behind. The biggest problem, aside from Greece's fiscal mess, is that Germany can't muster up enough political support to clean up after their mess more decisively despite the fact that they are now in the same monetary union. The catch 22 of these financial crises is that inaction will result in financial meltdown, decisive rescues political suicide.
Delayed action though leads to speculation and uncertainty as was shown in the past few weeks. Nothing changed in the Italian economic policy since friday last week, but monday and tuesday brought deep losses and the Italian BTP bonds reached the highest spread against the Bund in recent history. Today, 3 days later, Italy is back to a less crazy spread (still pretty high) and _nothing_ changed in its policy, 100 base points less over 300 in 3 days is pretty crazy.
The problem is not an economic problem but a political one. The cost of Greece bailout is a rounding error in Europe's total budget, the test ahead is about how the EU can start unifying the economic policy and grow more cohesively.
Lots of countries gave up monetary control power but without a unifying economic government body it's absolutely impossible for the weakest links to survive with all their issues without some help.
Lack of real unification is the problem, not economy per se. I think this is your point somewhat, am I right?
Thanks for the help. As you say, original detractors emphasized that Greece was at most a little over 2% of the EU economy but we've all seen how one bad apple can take down the whole barrel. Perhaps they need a stronger ECB. DSK was doing a commendable job holding it together until he got stopped in NY.
There are benefits to delayed actions..it helps people/banks/countries prepare for when unpleasant actions are required. In this specific case, it seems (from reading) that they are trying to buy time to make sure Spanish banks can mean newly set (and much needed) capital requirements.
I read at a financial analysis, that Italy experienced the most massive capital escape of it's recent history, so it is not that _nothing_ has happened, only probably it happened "behind scenes".
I agree that the core problem is the lack of economic unification.
If only it were that simple. It probably won't only be the Germans who end up footing the bill for this. As I understand it, German banks bought Credit Default Swaps on these loans, so there's no telling who will ultimately end up footing the bill.
do you know where much of the money from Greece has gone all this years? Weapons developed by Germany, and German industrial products bought with loans by Greeks, like cars, cranes and bulldozers.
Do you know witch country benefits from a weak euro so the can export a lot?
Germany has basically subsidized its formerly East-German states for 20 years now. Very much comparible in my opinion. After reunification, most East-German companies were not competitive (in large part due to the 1:1 exchange rate between East-Mark and DMark which was chosen for political reasons) and they never really catched up. But for West-German companies, it's a nice market to sell their products.
The real problem is that there are or will be efforts by the EU to persuade e.g. Greece to heighten the retirement age, or Ireland to increase corporate taxes -- without proper democratic legitimization. That's scary.
