Greece's finance minister George Papaconstantinou
Markets have cheered up a bit. Investors seem to have decided that Greece isn't such a problem after all. Not now that good old Germany's going to bail everybody out.
Of course, we don't know that yet. The EU summit is today. But at least they're taking it seriously, seems to be the view.
The reality is that the best thing the EU could do for both the euro and for Greece is to tell the country to sort out its own problems. But that's not very likely now. The mere act of introducing the potential for a bail-out has changed things. Now Greece's continued solvency is probably dependent on a bail-out of some sort. If the answer today is "no", Greek bonds will tank.
But even if the answer is "yes", the eurozone's problems aren't solved. In fact, in the long run, they'll only get worse...
Could Britain be dragged in to bail out Greece?
The fascinating thing about the Greek situation is that it puts the politicians involved in such a difficult position. Usually the outcome of any dilemma involving politicians is easy to predict. Find the path of least resistance and most short-term gain – that's the outcome to bet on.
But there is no easy path here. Each individual country's politicians have different goals. The Germans would rather not bail anyone out, because their taxpayers realise they're the ones who'll be carrying the can. But other indebted countries such as Portugal might rather like the idea of Greece creating a generalised bail-out template, as it could take some pressure off them.
And we're not even beginning to discuss the notion that countries outside the eurozone might be involved. For example, there's no guarantee that Britain won't be dragged into this bail-out. It seems insane, given our own levels of debt, but according to The Telegraph, Gordon Brown's been unable to rule out the risk that we'll end up shelling out for this. And when you realise that Britain provides 20% of the EU budget, you start to see why.
But on balance, faced with the prospect of a "Lehman Brothers with sovereign debt"-type situation blazing across Europe, the politicians are likely to cobble something together. Trouble is, even if a bail-out is arranged, this won't be the end of it.
Why a bail-out won't be the end of Europe's problems
As Laurence Copeland of Cardiff University Business School puts it on Reuters, you might be able to bail out Greece. But "the difficulty is that Italy, the euro zone's third-largest economic power, has a debt-to-GDP ratio similar to Greece's." And Belgium has similar problems. "So there could be a queue forming at the EU's fiscal soup kitchen." Indeed, Riccardo Marzi has already noted in the Events Trader newsletter that he reckons Italy is the real weak link in the eurozone.
And the ones doling out the goodies at that soup kitchen surely won't be too happy about it, says Copeland. "As voters in surplus countries realise they face years of paying taxes to support their less responsible euro brethren, I expect them to react in either or both of two ways: with new political movements which may well turn ugly, and with increasing demands on their politicians for more spending. After all, if they can't beat 'em, they may as well join 'em... The medium-term outcome will be a flood of euros as member governments' debts are monetised, with obvious consequences for the currency."
You can read his whole piece here. But it's clear that whatever the outcome of today's talks, things are going to stay messy for Europe. We'll have more on the outcome as news comes through, although the chances of a clear solution being reached today may be slim.
This is not just a European crisis - stick with gold
What about the rest of the world? Well, as Niall Ferguson points out in the Financial Times, this isn't just a European crisis. "What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch... Explosions of public debt incur bills that fall due much sooner than we expect."
Debts look unsustainable everywhere from the UK to the US. Yet politicians in each of these countries seem to be taking the view that spending can continue now, with austerity waiting until "after the crisis is dealt with". The trouble is, as Japan shows, you can spend an awful lot of public money and still end up stuck in a 20-year recession.
In short, this is a very good reason to be sticking with gold. As my colleague Dominic Frisby pointed out yesterday, gold is currently rising and falling with global stock markets. But as investors gradually realise that no major currency is going to avoid being printed into oblivion, the idea of buying a form of money that can't be easily manipulated by governments will become more and more appealing.
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