Over the past month the Greek debt crisis has been putting quite some pressure on the rate of the Euro. This does not seem justified, as a Greek default can only strengthen the Euro in the long run. The reason is simple: at the root of the Euro perils lies out of control government spending. What better way to return to discipline EMU member states than a bankruptcy of the most outrageous Euro member Greece?
Yet prominent European politicians still prefer to keep Greece afloat in spite of its third world performance. European banks are 'too exposed' and prone to fail when Greece defaults. That sounds severe, but the numbers to support this claim simply don´t add up. EMU banks hold a total of only €53 billion in Greek bonds, €57 billion less than last years' Greek bailout fund. These banks receive high yields on these bonds as long as Greece does not default. In other words: EMU banks have a vested interest in maintaining the status quo.
We are also told that should Greece go bankrupt, their peril could 'contaminate' the other PIIGS. Interest levels would rise; PIIS governments will not be able to raise capital and ultimately default as well. But saving Greece only postpones the inevitable: interest levels for these countries should increase now while they still have leeway to reduce their deficits.
Too big to fail is an illusion, for banks as well as for governments. Greece is simply too big a mess to support. That does not mean the country should leave the Euro. Quite the contrary: Greece and the Euro are much better off by continuing its EMU membership. For Greece it means stability: the Euro puts a restrain on government, prevents bank runs and capital flight and keeps it appealing for foreign investments. For the Euro zone it would demonstrate that a currency union does not require a federal Europe.
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