Greece is seeking a two year extension of its latest austerity program, arguing that the additional time would improve its chances of ultimately bringing its debt down to a sustainable level. This is hardly news. Many observers had already concluded that the latest plan was as unworkable as prior ones. But it does illustrate that the inconclusive, status quo can persist indefinitely. As with the penalties envisaged in the Maastricht Treaty that ushered in the Euro, fiscal penalties on sovereign states are a nuclear option and as such are only valuable until they’re used.
While many analysts have forecast that Greece will either be dumped out of the Euro or will leave voluntarily, regardless of who initiates such a move the consequences are huge and unpredictable. As long as neither side miscalculates, it’s quite plausible for this seemingly perpetual round of renegotiations in which the Greeks seek forms of debt forbearance but stop short of provoking the EU to kick them out and the Germans keep squeezing but stop short of driving them out. As unsatisfying as this may seem to an outsider, why would it ever end?
By reducing the odds of an imminent Euro disaster it makes equity markets somewhat less risky, and bonds less attractive. Of course we still have to contend with the looming fiscal cliff in the U.S., a potentially far more damaging event for the U.S. economy and one whose resolution has been pushed off to a post-election lame-duck Congress with highly unpredictable results. Whatever your political leanings, virtually everyone must agree that this is an abrogation of responsibility by America’s leaders.