Greece's Future as at March 2010

Greece is in trouble. Why? Fast-forward 5 years and describe the most likely outcome of the current problems and their consequences for global banking and financial markets.

To discuss the reason(s) why Greece is in trouble I would like to start off by looking back at the Maastricht criteria (Convergence criteria) that countries have to fulfill to enter the euro zone. The four criteria described in article 121 of the treaty impose control over: inflation, public debt & public deficit, exchange rate stability, convergence of interest rates. The second criteria imposes an annual government deficit < 3% of GDP and government debt < 60% of GDP. Well, Greece has been able to hide its deficit up to now which actually turns out to be around 12% of GDP! How did it come to this?

First, there is the Euro skeptic view: Milton Friedman said in 1998, one year before the Euro introduction, that the Euro would not survive the first economic crisis. According to a number of economists the problems are:

• The inflexibility of the Euro zone makes it not possible to carry a single currency

• No labor mobility due to important differences among countries

• No single fiscal policy

• Fixed exchange rates between strong countries (Germany, France,…) and weaker countries (Greece, Spain,...PIIGS[1]) ( new Bretton Woods?

The ECB monetary policy is essentially focused on the string economies. Countries like Greece, Spain and Italy have been enjoying lower interest rates that the ones they were used to before but they have not used these low rates to reduce their debt. One can compare it a bit to the subprime crisis where mortgage brokers lent money to people that actually did not fulfill the criteria. Well here, countries like the PIIGS were also benefiting from conditions that did not match their situation.

Second, there is the Maastricht circumventing strategy:

As recently came out, Greece was able to manipulate Luxembourg based...