Greece is navigating dire straits as it attempts to undo some of the damage done from some irresponsible financial decisions. They have already made huge budget concessions (euro 16 million / $22 million) and received harsh judgment from their citizens in the form of protests and riots. The next chapter in this story will be integral in determining if the European Union can truly withstand the test of time.
In Europe, wildly variant political ideologies are visible across a continent that is in many ways as diverse as any in the world. Short election terms make any power wielded by the EU leaders mostly ceremonial and borderline insignificant. Finally, the body of the EU does not wield a military and must yield to certain countries that possess disproportionate power on the continent (i.e., Germany). In the United States there is a struggle between state and federal government. This is the balance that was built into the country from inception. The European Union is a very different animal.
What does all this add up to? It basically means that incentives do not exist to prop up a failing neighbor in the short term. It costs a pile of money and spreads the burden of an irresponsible nation across “innocent” countries. This can be read as socialism, but ignores what is written between the lines. A huge opportunity exists for the Euro to become the most important currency in the world, and this situation threatens to derail that opportunity.
The Euro is still attempting to solidify it’s place as the second (and maybe first) most important currency in the world. There are plenty of problems with the United States in terms of political and monetary policy. It is easy to point fingers at the US, and with the recent threat from S&P to downgrade Treasuries from AAA (a ridiculous situation that I’ll cover later), there has never been a better time for the Euro to step up and provide the stability everyone craves after an earthquake.
This is a huge opportunity for the EU, save one “minor” problem; they aren’t acting like they feel stable. If Greece has to crawl to the IMF for funds, it will be an embarassment to the entire Union. The costs associated with providing a prop for Greece in the short term will pale in comparison to the long term costs to the EU if markets lose faith in them as a whole. Speculation would begin about how strong the rest of the Union is financially, and why they wouldn’t bail out a fellow union member given these historically unique conditions.
The EU needs to face this head on, or they risk losing the faith of already skittish markets.
