Now Greece Is Just One Step Closer To Leaving The Euro

greece flag destroyed

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Greece has angrily rejected a German proposal that would co-opt control of the struggling country’s budget in exchange for the next round of bailout funds to keep it afloat, according to the BBC.In an interview with local television, Greece’s education minister and former EU Commissioner Anna Diamantopoulou even called it, “the product of a sick imagination” (via the Telegraph).

Greek Finance Minister Evangelos Venizelos even said today in a report from the Greek eKathimerini, “Whoever puts before a people the dilemma of choosing between financial assistance and national dignity disregards basic historical lessons.”

However, the Telegraph reports that the IMF, too, has signaled its support for more EU control of Greece’s budget. And if the IMF is on board with the plan, this could be a momentous sign.

We’ve argued before that the odds of private investors going through with a “voluntary” plan to impose haircuts on Greek bonds are incredibly small, regardless of whether or not representatives of the banking sector can come to an agreement with Greek officials. Beyond legal challenges, a high-handed effort to skirt CDS payouts would destroy confidence in CDS altogether, and in EU leaders’ willingness to play by the rules.

But this newest round of rumours about the EU co-opting Greek sovereignty amounts to doing the unthinkable: telling the Greek government that it has to give up control over itself, or else. And it can’t be a move Germany actually expects Greece to stomach.

Germany is unsurprisingly fed up with Greece’s inability to implement the spending cuts and austerity measures EU leaders have demanded, but the country has already lost significant levels of sovereignty as part of the EU/IMF-led programs. Germany and the rest of the eurozone can’t actually kick a country out of the euro for fear of investor panic and speculation against Portugal, Italy, Ireland, and Spain. But if Greece were to leave on its own…

Yielding control to the German-led core is not something Greeks are going to put up with. The fact that nine in 10 Greeks are unhappy with Prime Minister Lucas Papademos’s performance (via Bloomberg)–in reality, his willingness to meet the demands set forth by the European Union–implies that Greeks are increasingly resistant to doing what is necessary to stay in the euro.

If it stays in the euro, then Greece will suffer years of austerity and financial turmoil. If it leaves, then steep devaluation will probably return the country to growth much more promptly, albeit with a long-term stigma for investors.

Sooner or later, Greeks are going to face the facts: it’s probably a better bet to leave the currency than to suffer years of financial hardship. Whatever its true intent, this latest German proposal may just help Greeks face the facts.