Greece and Europe Play Financial ‘Chicken’

Greece and Europe Play Financial ‘Chicken’

Like a storyline out of a classical tragedy, the euro is being punished for the sins of Greece. The Hellenic Republic's massive debt has shaken market confidence in the common currency and led to a volatile month in its exchange rate. Feeling increasing pressure to intervene, European policymakers have been forced to weigh what is best for the euro against what public opinion will tolerate. For now, none of the choices are appealing. Nonetheless, a decision must be made, and as this game of "financial chicken" unfolds, the only thing certain about the outcome is that no one is likely to be happy with it.

Spending too much, taxing too little, and borrowing too heavily: As vicious cycles go, Greece's was both simple and effective. But when a country consistently shows a lack of fiscal discipline, financial markets often impose discipline of their own. Greece is no exception. As it became clear that the country's debt -- two-thirds of which is held by foreigners -- was unsustainable, markets began to fear that Athens might default. Besides downgrading the country's credit rating last month, markets also began to pressure Athens' currency -- the euro.

Because of the common currency, the Greek headache has now become a European migraine. The past several weeks have seen the euro fall against the dollar, leaving Europe faced with a dilemma: bail out Athens and protect the Euro, or leave Greece to the wolves and risk further decline in the euro's value and stature.

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