Greece default will put Euro in peril


Greek Prime Minister George Papandreou speaks at the Brookings Institution on March 8, 2010 in Washington, DC. Prime Minister Papandreou spoke about relations between Greece and the United States and the current economic situation in Greece.



The first bombshell was dropped by the Greek Prime Minister. Now EU leaders have reciprocated with a nuke drop of their own. In a hastily convened meeting between German chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou the EU leaders made it clear that the referendum called by Papandreou is a referendum of Greece continuing with the EU.
Should the voters respond with a ‘No’ to the bailout package, and the Greece’s leaders were to heed that call, EU will be obliged to throw Greece out of the club and stop all payments of the bailout money already promised.
Furthermore, the two leaders have said that Greece will not get the next tranche of the bailout fund until the referendum took place and ended with a ‘yes’. The $8 billion fund which was supposed to be given to Greece is vital for its continued functioning.
Sarkozy said that if Greece decided to default, it will not get a “single cent”. The unusually tough language underscores the deep anger that European leaders are feeling towards Greece and in particular towards PM Papandreou.
Last night the two leaders acknowledged that the crisis may end in Greece leaving the European Union, a prospect that was unthinkable until now. There is also a sense that EU leaders have run out of options.
Papandreou does have a solid reason for asking for a referendum. The cuts and austerity measures that the bailout requires are deeply unpopular. Protesters have been clashing with police in Athens over it. Further cuts and more austerity will only exacerbate the situation. However, the greeks do not seem to want the second option either; and default and facing up to the consequences. Papandreou wants them to choose either of the two bad options and live with it.
However sound the idea maybe in theory, Papandreou government might fall this week over it. The government faces a confidence vote which it likely would lose. The scary alternative is that Greece would hold the referendum and opt to go out of the Eurozone. Then of course, the pressure of the default will move on to Spain and Italy, and were these two to collapse then all the funds in Europe will not be able to bail these two countries out.
It would be bye bye to euro.