How mac at the Daily Mail saw it.
The Euro Zone leaders came up with another helping of Euro Fudge AND applied a large band aid to Greece. That should keep the markets happy until the end of the summer holidays, helped by the fact that the political elite will be away sunning themselves.
Pumping another 96 billion into the Greek economy should keep the markets happy, or at least less nervous, and take the heat off Spain and Italy for a few weeks, but it is a very long way from a real solution. The Greek Government will now come under two very strong pressures. The Germans can be expected to keep up the pressure for major public spending cuts in Greece. The population will be mounting an equally strong pressure to reduce the cuts. Greek citizens have come to realize that they will be paying for the bailout long into the future. German citizens are coming to understand just how much they are paying to prop up the Euro currency and they don’t like it.
Once again, the EU has moved only far enough to put off the real decisions and, as with early attempts at Euro Fudge, the markets are reacting in the belief that all will be delivered and a miracle will happen. In the previous fudges, the markets begin to lose confidence as they see the reality behind the political spin and the crisis picks up more steam, moving to a worse position than at the previous temporary fix.
If the US tried to get international help with the Californian economy as though California was a sovereign nation that just shared the US$, it would get short shift, but this is exactly what is happening with Greece. Until the Euro Zone accepts that a single currency is a single nation, the problems remain. Greece probably never met the criteria for joining the Euro in the first place and then made the situation worse by hiding under the Euro and spending as though there was no tomorrow. Ireland rode a bubble of false expansion and again hid the reality with the Euro.
The core problem facing the Euro now is that it is too late to just sacrifice Greece. If Greece leaves the Euro, the debt burden is reduced but only be a very tiny amount. Even if Ireland and Portugal were also sacrificed, the total Euro Zone sovereign debt is not greatly reduced. However, the markets are likely to see the sacrifice of the three economically weakest countries as evidence that the Euro will implode and pressure will increase on Spain and Italy, spreading to France because investors will see this as significantly reducing EuroZone sovereign debt. At that stage pressure might ease because Germany will be seen as the real strength of the rump Euro. The difficulty there is that the France is unlikely to accept that situation. French citizens may be very happy to see the back of the Euro but not their political elite.
The fact that Germany and France stitched up a deal behind the backs of their fellow Euro Zone members identifies the real core of the Euro problems.
The elephant in the room remains the US. There are signs that Republicans and Democrats are trying to come up with a compromise but a compromise may do little to resolve US financial problems. Any give to the Democrats will see taxes rising and the economy failing to grow. The increased public borrowing, demanded by Democrats, would damage market confidence severely. Giving ground to the Republicans is also not beneficial because their approach requires a full commitment to market forces, small government and significant public spending cuts, a compromise simply doesn’t cut it. No one knows what the most effective solutions would be, but the path of public spending cuts and the maintenance or reduction of taxes look like the best of a range of difficult options.