The last thing that President Obama needs before the November election is a Greek exit from the euro. Such an event would surely cause contagion to the rest of southern Europe, which would in turn roil global financial markets. Yet the evidence coming out of Athens suggests that such a Greek event could very well occur over the next few months, with all of its adverse consequences for the U.S. and global economies.
Among the least favorable signs coming out of Athens is the pause in International Monetary Fund-European Union (IMF-EU) negotiations with Greece over the next loan disbursement. These negotiations have now been suspended until early September in order to give the Greek coalition government more time to iron out its differences on the budget measures to be taken. In the meantime, the Greek government is literally running out of money. Without any further disbursements from the IMF-EU program, Greece will almost certainly default on its official loan obligations by October.
In the IMF-EU negotiations, Greece’s German taskmaster, Chancellor Angela Merkel, is insisting that Greece fully comply with its original commitments under its IMF-EU program before any further money is released. In particular, the Germans are insisting that Greece credibly commit itself to cutting public spending by as much as 5.5 percent of GDP in 2013–2014 as a means to restore Greece’s battered reputation with respect to its seriousness about implementing the IMF-EU program. And the Germans are doing so despite the already very depressed state of the Greek economy and the likelihood that further budget austerity will only exacerbate and prolong Greece’s economic depression.
Desmond Lachman is a resident fellow at the American Enterprise Institute.
The full text of this article is available on The American website.
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