President Obama's ticking Greek time bomb

Article Highlights

  • The last thing that President #Obama needs before the November #election is a Greek exit from the euro.

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  • Recent evidence coming out of Athens suggests that a Greek euro exit could occur over the next few months.

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  • Though IMF-EU negotiations have been suspended until September, the Greek gov’t is literally running out of money.

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Developments in Athens suggest matters are spiraling out of control.

The last thing that President Obama needs before the November election is a Greek exit from the euro. Such an event would surely cause contagion to the rest of southern Europe, which would in turn roil global financial markets. Yet the evidence coming out of Athens suggests that such a Greek event could very well occur over the next few months, with all of its adverse consequences for the U.S. and global economies.

Among the least favorable signs coming out of Athens is the pause in International Monetary Fund-European Union (IMF-EU) negotiations with Greece over the next loan disbursement. These negotiations have now been suspended until early September in order to give the Greek coalition government more time to iron out its differences on the budget measures to be taken. In the meantime, the Greek government is literally running out of money. Without any further disbursements from the IMF-EU program, Greece will almost certainly default on its official loan obligations by October.

In the IMF-EU negotiations, Greece’s German taskmaster, Chancellor Angela Merkel, is insisting that Greece fully comply with its original commitments under its IMF-EU program before any further money is released. In particular, the Germans are insisting that Greece credibly commit itself to cutting public spending by as much as 5.5 percent of GDP in 2013–2014 as a means to restore Greece’s battered reputation with respect to its seriousness about implementing the IMF-EU program. And the Germans are doing so despite the already very depressed state of the Greek economy and the likelihood that further budget austerity will only exacerbate and prolong Greece’s economic depression.

Desmond Lachman is a resident fellow at the American Enterprise Institute.

The full text of this article is available on The American website.

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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