But given the enormous disaster that would likely befall the Eurozone if Greece leaves the currency union, is this a threat the EU can afford to make? There is a real risk that this latest move could backfire. Massive protests continue in Athens today as people stand in front of the parliament chanting "we won't pay". Inside the building, Socialist prime minister George Papandreou is holding a confidence vote to reaffirm his mandate before he attempts to push these austerity measures through the parliament.
Germany, is dictating draconian measures in an anti-democratic way. A perceived insult like this could put public optinion in Greece over the edge and cause even more Socialists to withdraw from the parliament. If Papandreaou's government falls it could mean a default on Greece's debt and, most chillingly, a withdrawal from the Euro. These events could spiral out of control and cause a meltdown of the European economy, and maybe even the world economy. Given that reality, is this really a threat the finance ministers can afford to make?
A Greek default, which would have huge consequences for banks worldwide who now hold €340 billion of Greek sovereign debt, would have immediate ramifications for the other countries that have taken bailouts from the EU – Portugal and Ireland. The perceived risk of lending to those countries would be increased, making it near impossible for them to get loans. The debt markets would next pounce on Spain and Italy, who are also holding mountains of debt. The European Central Bank, which now holds the largest amount of debt from all of the struggling PIGS countries, would likely go bust as a result of all this and require a bailout itself from the Eurozone countries.
So now all eyes are on Athens to see if Papandreou is able to survive the confidence vote and push through the austerity cuts in order to get the remaining EU bailout money. The measures the EU is requiring include €28 billion in tax increases and government cuts, and a 20% cut to the civil service. They are also demanding that all political parties sign up to the austerity measures, so that there isn't a risk that a new government can take power and renege on the agreement.
Brussels, mirroring the much larger protests now happening in Madrid, Lisbon and Athens. People are starting to talk about the potential for a global "1930's-style disaster" if the Greece situation is allowed to spiral out of control. Yet in the US there is little attention being paid to what is going on here. On yesterday's Meet the Press David Gregory tried unsuccessfully three times to get the invited politicians and pundits to react to the crisis unfolding here in Europe, but no one wanted to address it. Republican Senator Lyndsay Graham literally ignored the question and instead started talking about the domestic fight over raising the debt ceiling.
But the Americans ignore this crisis at their peril, and there may be a point in which they have to step in because the Eurozone finance ministers seem to be completely overwhelmed. The non-euro EU members seem intent on either ignoring the situation or actively making it worse. British Chancellor George Osborne will today insist that Britain will not participate in any effort to bail out the stricken Greek economy – that it will do nothing if it looks like the country is about to implode.
Daily Telegraph today, saying that Greece should default on its debts and leave the euro. The column has been greeted with shock by many British economists, who can't believe that the London mayor seems to be unaware of the financial calamity that is predicted for the British economy should Greece leave the eurozone. The UK may not use the single currency, but its economic fate is inextricably tied to it either way. A collapse of the eurozone economy would mean a collapse of the British economy.
As the Obama Administration watches all this mess unfold, they may choose to step in. It's unclear what form that could take, but there are already indications that the administration considers the Greek situation suitably grave that drastic action may be necessary.