The eurozone has dug itself a hole all the way to Hades

by Nils Pratley

Guardian
June 20, 2011

The eurozone leaders have dug themselves into a terrible hole. They say they can't dispatch funds to Athens until the Greeks sign up to further austerity and pledge to stick to their commitments better than they did the first time. But this threat doesn't carry credibility. Everybody, including Greece, suspects the cash would be forthcoming if financial catastrophe loomed, as it does now. That is because the eurozone has no alternative strategy: there is no plan to cope with the consequences of a Greek default.

The International Monetary Fund (IMF), in calling for "a more cohesive and co-operative approach to manage the crisis in the periphery", raised the stakes several more notches. Get your act together, the IMF told eurozone leaders. Quite right, too: the idea that the application of more sticking plasters can delay a crisis until 2013, when a permanent lending mechanism is established, has been exploded over the past fortnight. The Greek crisis has to be resolved before then.

The key is for the eurozone leaders to accept that Greek default is coming one way or another and to agree policies to prevent contagion, such as recapitalising the eurozone banking system so that it is in a position to bear the pain.

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