The crisis over Grecian debt has triggered a rapidly escalating economic storm that is spreading in its impact on the 16 European countries that share the euro as their common currency. It is formally known as the European Monetary Union. The politicians have been fiddling while Athens burned and the fire is now spreading.
Greek debt crisis: Euro leaders call emergency summit to avert meltdown
The leaders of the 16 countries using Europe's single currency called an emergency summit today to try to avert a euro meltdown triggered by Greece's financial collapse.
Wrestling with the worst crisis in the common currency's 11 years and accused of fiddling for three months while Greece went up in flames, Angela Merkel of Germany, Nicolas Sarkozy of France and other European leaders are to meet in Brussels on May 10 to unlock tens of billions of euros for Athens to put out the fire.
Greece is in effect insolvent, on the brink of the common currency's first case of sovereign debt default unless it is bailed out.
That presents the other 15 governments of the eurozone, notably Germany, the EU's traditional paymaster, with its biggest challenge and its worst dilemma.
Greece threatens to expose the euro as a fair-weather currency, highlighting the multiple contradictions and inherent frailties of trying to marry the economic realities of 16 different countries. When the going gets tough, it shows the lack of proper fiscal and economic policy instruments to underpin a currency union.
The problems with Greece and their increasing inability to finance their debt on the open market has been raging for months now. European leaders have dithered and passed the buck. On the one hand they would like for the International Monetary Fund to pick up the bill. However, turning to the IMF puts them on the same footing with third world banana republics.
In the last two days their hands have been forced by the credit rating agencies. Yesterday S&P downgraded Greece to junk and lowered the rating for Portugal. Today they lowered the boom on Spain. The exchange rate for the euro has been declining by the hour. Ireland also has similar problems and is likely to be swept up in the contagion.
The key focus of all the negotiations is on Germany and its chancellor Angela Merkel. As the wealthiest member of the EMU they would be expected to make the largest contribution to a bailout fund. Merkel is the leader of a fragile conservative coalition and is facing crucial regional elections. German public opinion has been running against a tax funded bailout for other members of the EMU. They have been willing to undergo considerable belt tightening in an effort to remain economically competitive in international export markets and as a result are not in a generous mood.
It does not seem like an exaggeration to say that this may be a point of historical choice for the EMU. It is a group of countries with very different economies and fiscal policies shackled together by a common currency and monetary policy. Many economist expressed doubt that such an arrangement would work at the time that it was formed. The present recession seem to have brought the chickens home to roost. If the arrangement is going to be held together, it seems inevitable that there will have to be a commitment to sharing fiscal responsibility. With that is likely to go demands for imposing common standards of financial and social policy. This could place the future of the relative generous European social safety nets in jeopardy.