So today the European Union issued its long-awaited statement on whether or not it would bail out Greece. The answer was a clear and unambiguous signal to global financial markets: maybe-kinda-sorta-let’s-see-where-it-goes-from-here-and-then-we’ll-talk. For those who haven’t been keeping score at home, Greece is in quite a bit of financial trouble (much like California), due to government revenue dropping dramatically and spending rising dramatically because of the recession (much like California). Since Greece is on the euro, it can’t let inflation ease the burden on its debt (much like California), and so it is faced with the option of painful tax hikes, sweeping service cuts, or risking default (much like California). Unlike California, it is a manageably small part of the European economy…but its troubles are closely matched by Portugal, Spain, and Ireland, which are much larger economies (like California!) and really what this Greek trouble is all about.
If Greece’s credit rating takes a hit, its debt becomes more expensive and it starts spiraling towards default and probable crisis. Since Greece doesn’t control its own currency, it can’t get bailed out by the IMF, it needs the EU and thus Germany is needed. Germany doesn’t want to bail out Greece due to their domestic distaste for bailouts (other than for the German banking or auto industries). So a Greek downgrade could lead to a rapid spiral as other European sovereign debts are attacked, potentially ripping apart the Eurozone and probably leading to some sort of financial crisis. But a Greek bailout could necessitate bailing out the much, much larger combined economies of Portugal, Spain, and Ireland. It’s not an easy choice, but some sort of unified and decisive action is probably necessary.
So the European governments have decided to take a firm line on “meh”. Good work, team!
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