Dealing with a recession of the magnitude of the current one, which is the biggest since the Great Depression of the 1930’s, is the first big test of the EU’s power to stay together.

A delegation from the EU and the IMF arrived in Athens yesterday to see if the Greeks plans to pay off their debt will work. This is necessary before they release the next slice of money promised to Greece one year ago as part of a 110 billion package of aid.

Germany has already provided the following suggestions to Greece: 1) slash spending 2) raise taxes 3) sell government assets such as Olympic stadium, parcels of land, and a horse racing facility. But such suggestions are not politically possible in Greece, which is where its northern partner’s value system is in conflict with its Balkan neighbor’s.

German Finance Minister, Wolfgang Schauble, said that Germany could provide more aid if certain conditions are met. He has suggested lowering the interest rate on Greece’s debt, providing more aid out of the EU’s bailout fund, or having Greece’s debt holders trade in their bonds for ones of a later date of maturation. In extreme circumstances Greece could pay less than it owes on the bonds, giving the bond holders a “haircut”. But this could create a domino effect throughout the southern tier of Europe and tear at the fabric of the EU apart even more.

Schauble and the Germans will not give up easily. I suspect that they will continue to provide aid to the Greeks until it is no longer needed if that ever happens. Greece now owes 350 billion in debt and it is growing. Some doubt if it will ever be repaid. But if Germany is ever going to have a wide reach for its own currency, they must not abandon Greece.

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Wolfgang Schauble

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