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EUROPE HAS ADOPTED a don't ask, don't tell policy of its own regarding Greece.
After a crucial meeting of European Union finance ministers in Brussels Thursday, EU President Herman Van Rompuy declared, "Euro area member states will take determined and coordinated action if needed to safeguard stability in the euro area as a whole."
What that meant is anybody's guess. Greek officials said they did not request aid to cover their government's massive budget deficit and there was no mention of any aid such as the German-French-led financing package that had been widely rumored ahead of the confab.
Despite the murky situation, global markets were encouraged that the EU declared solidarity with its most-beleaguered member, even if not a single euro backed up their pledge. Stocks rallied, led by materials shares, as metals and oil prices rebounded from their recent slump, which had been in reaction to concerns over the European debt situation and China's recent credit-tightening moves.
But there appears to be a sharp divide between the markets' optimistic expectations that some sort of bailout will be given to Greece by other EU nations and the political will of those presumed donor nations to provide money to profligate governments that appear unable to put their fiscal house in order.
The Germans, in particular, seem loath to rescue Greece. "It was one thing for them to bail out East Germany," observes F. Mark Turner, a long-time global fixed-income manager who heads the Tiedemann/Pentagram hedge funds. After the reunification of Germany in the early 1990s, West Germans provided massive aid to what they saw as their fellow countrymen in the former communist East Germany.
That is a far cry from the attitude of many Germans to Greeks, whom they as responsible for own fiscal mess. Wednesday, members of Greece's bloated public sector took to the street to protest cuts needed to help slash the government's massive budget deficit from 12.7% of gross domestic product.
As a result, doubts were beginning to appear after U.S. markets closed Thursday amid reports of German reluctance to back a quick bailout for the Hellenic Republic, according to the MF Global Interest Rate Products Group in Chicago.
That slippage may reflect an article in the U.K.'s Guardian, they added, stating German chancellor Angela Merkel opposed providing quick financial assistance to Greece, causing a rift with other EU heads on how do deal with this threat to the euro.
"Despite a show of Franco-German unity on the crisis and the first statement from EU leaders pledging to safeguard the currency's stability, hopes on the markets of a German-led rescue plan to shore up Greece's critical public finances were dashed by Merkel, who repeatedly emphasized that Athens would need to put its own house in order and brushed aside all questions of financial support," the Guardian reported.
In addition to Merkel, German Finance Minister Wolfgang Schauble is described by Stratfor as a hard-nosed official and an "absolute hard-liner" when it comes to states' adherence to the requirements for the euro, one of which is to cap budget deficits at 3% of GDP. With Schauble likely heading any bailout initiative, Stratfor concludes that "Greece -- and anyone else who might need financial help from Berlin -- cannot expect something for nothing."
Moreover, Turner of Pentagram pointedly observes that there's an increasing disconnect between governments are trying to do and the desires of the populace. "Didn't voters in Massachusetts turn thumbs down on profligate government spending?" asks this Bay State resident.
That attitude is shared by a fair number of Germans, many of whom never wanted to give up their beloved deutschemark for the euro, and bristle at their taxes being sent to bail out the profligate states of Club Med in southern Europe.
Turner also points to the veto last month by Iceland's president of legislation to repay a loan to the U.K. and the Netherlands to cover deposit insurance for British and Dutch savers who lost $5.5 billion in the collapse of Icelandic banks last year. A referendum will be held next month after a massive protest campaign in which nearly a quarter of Iceland's voting-age population voiced strong opposition to paying such a huge sum for that tiny country to pay off foreign depositors.
Meantime, the armies of the young unemployed across Europe are likely to emulate Greek public-sector employees and take to the streets with protests over needed budget cuts once the weather turns warmer.
Most likely, the ruling elites will find some way to paper over the deficits and quell civil unrest, all in order to preserve their grand experiment with a single currency.
Comments: randall.forsyth@barrons.com
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