Wall Street Journal
May 10, 2011
German politicians should be careful what they wish for.
Faced with angry voters, German leaders are understandably anxious to find ways to avoid further bailouts for Greece. But wild talk of restructuring or countries leaving the euro zone—the latter raised again Monday by a member of Germany's Free Democratic Party, the junior partner in the ruling coalition—is dangerous, and not only for Greece.
Germany is right to explore its options, if only to prove how few it has. The country is providing the largest share among euro-zone nations of the funding and guarantees on Europe's bailouts. A fresh downgrade by Standard & Poor's on Monday confirmed the market's view that the Greek debt position is unsustainable. A principal reduction of more than 50% may be needed, S&P says, which can be achieved only via a fiscal transfer or a default. In the meantime, the country faces a €26.7 billion ($38.3 billion) funding gap next year.
Germany already is backing away from some of the more extreme options doing the rounds. A Greek exit from the euro—even if it was legally and logistically possible, which is doubtful—would be a disaster for Greece and the euro zone. The Greek banking system would implode; cut off from funding, Athens would have to impose even harsher austerity measures to eliminate its primary deficit. Devaluation would bring few benefits without improved productivity. Meanwhile, contagion would spread to the rest of the euro zone.
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