In the short run, it now seems as if the euro has been saved. Greece has received a massive infusion from the EU, its bonds are selling once again, the birds are singing and all is right with the world.
But Wolfgang Münchau makes a persuasive case that in the long run, a Greek default remains very likely. The structural adjustments required to get its budgets back into reasonable balance are simply massive (hence the demonstrations that keep turning into near-riots). That is going to require considerable austerity from the population, not to mention unemployment.
It has been done in the past, but with one key difference: the countries involved were able to devalue their currencies. This lowered the burden of paying debt denominated in the local currency, and it also made exports more competitive, giving a boost to employment.
Greece doesn't have this option. It's going to be stuck with a monetary policy that will be way too tight for the economic pain it is experiencing, exacerbating the difficulty of paying the debt, and the broader suffering of the citizenry. Not to mention the political pressure to exit the euro.
Though it's weathered this episode, I continue to think that the euro remains extremely vulnerable. The problems of running a monetary union between countries with vastly different business cycles, economic structures, and political resources, can apparently only be overcome with fairly massive transfers. How many times will France and Germany be willing to open up their wallets?
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