Why Germany and France Should Support a Greek Bailout
Written by James Chan   
Wednesday, 28 April 2010 15:47



Franklin D. Roosevelt, who knew a thing or two about recessions, once said that if your neighbor’s house catches fire, you should lend him a hose without asking for anything so that the fire doesn’t spread to your own house. Granted, he was talking about lending Britain weapons for World War II, but the maxim can also be applied to Greece’s escalating debt crisis.

Greece is very much a house on fire and in need of help. It has recently asked for a bailout from the European Union and the International Monetary Fund to save it from escalating interest rates due to repeated downgrades of its government bonds by Moody’s. At this point, Greece has basically admitted that despite the austerity measures it has taken to cut government spending, it still cannot find the money to repay an upcoming $8.5 billion bond payment. If it isn’t bailed out, the Greek government will most likely default on its bond payments, causing chaos in the European monetary system.

However, despite a prior agreement by European Union financial ministers on a $30 billion Euro emergency loan, many Europeans, especially those in France and Germany, do not want to bail out Greece, viewing the loan as encouraging further fiscal irresponsibility from a country infamous for it. This can pose a problem as any loans to the Greek government have to be approved by their legislatures, who face intense reelection pressures. Their mentality is strikingly similar to those of Americans viewing the Wall Street bailouts: why should we pay for the mistakes and problems of others? Similarly to Wall Street, the failure of the Greek fiscal system would bring about catastrophic consequences for the financial system it is connected with (namely, Europe’s economy).

First of all, Greece’s fiscal situation affects that of other countries in the Eurozone. In the two days surrounding Standard and Poor’s downgrading of Greece into junk bond status, two other countries, Spain and Portugal, were also hit with bond downgrades. In the minds of analysts and investors, the fiscal health of European governments is interconnected. Therefore, if France and Germany votes down the bailout, it can potentially destabilize the fiscal situations of not just Greece, but other countries in the Euro zone.

Greece’s potential default will also impact more fiscally stable countries such as France and Germany through a more indirect way: the Euro. Today, Greek concerns have devalued the Euro to a twelve-month low against the dollar. If the fiscal situation continues to deteriorate, the Euro may further fall, causing a drastic monetary crisis for the 16-member union, where individual countries cannot set monetary policy due to a common currency. A decrease in the Euro will make imports much more expensive, cause runaway inflation, and destabilize the entire European economy in a way reminiscent of the Asian currency crisis of the late 1990s.

France and Germany’s populations have viewed Greece’s problems as a “they caused the problem, they’re responsible for the solution” situation. Unfortunately, the negative repercussions from a bond default would impact the entire European economy and possibly end the Euro. In such a vulnerable economic climate, the global and European financial system cannot allow such a catastrophe to happen; the EU and IMF should bail out Greece now and worry about punishment later.


(Photo: Eustaquio Santimano)