The big Greek vote for an austerity budget last month was supposed to have staved off fears that Athens would not be able to make a large debt repayment - and hence avoid a default. Now, however, European Union states are dithering on a bailout plan for a bigger, 115 billion euros (US$163 billion) tranche of Greece's debt. This has led to spikes in interest rates for wobbly states such as Italy and Spain, and stock-market runs worldwide. The unfolding crisis is increasingly looking like fire-fighting a rampaging bushfire.
Essentially, there are two contending schools of thought as to how the Greek debacle can be solved. Germany has bowed to popular pressure at home and demanded that private bondholders of Greek debt bear some of the burden for the rescue. France is offering a somewhat softer - albeit more complex - financial plan. And until the Germans and French sort out their differences, the rest of Europe will remain undecided, even on a time to meet to resolve the impasse.
In the meantime, the European Central Bank (ECB) is playing a game of chicken with ratings agencies. The agencies have threatened to declare a default even if private bondholders enact a 'voluntary' rollover of Greek debt. If that occurs, the ECB has threatened to pull the plug on Greek banks and let all hell break loose.
Therein lies the rub. Even a rollover would be tantamount to throwing good money after bad. But a declaration of default would trigger contagion across Europe and take down bigger economies such as Italy. If Italy falls, the financial crises in Greece, Ireland and Portugal last year would pale in comparison. Italy, after all, is the European Union's third biggest economy. No wonder, there are now calls for Germany to leave the euro zone, re-establish a zone of safety in northern Europe centred on a revived Deutschemark, and leave the profligate southerners to their own devices.
The Europeans are indeed cognizant of the sheer scale of the problem facing them. In an impassioned letter to Jean-Claude Juncker, the head of a Eurogroup of finance ministers, Greek Prime Minister George Papandreou stressed that the inability to make the 'right, collective, forceful decisions' will run the risk of 'global, market calamities due to a contagion of doubt that could engulf our common union'. But Juncker has to consider two imponderables: how the Greek debt would be financed, and how Europe's banks can take a hit without substantial governmental aid. Until they can solve such imponderables, the sword of Damocles will hang over Europe.
