The Global Can-Kicking Contest

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The latest word out of Europe is that finance ministers and the International Monetary Fund cannot agree about a bailout of Greece. The troubles are as much political as financial, which makes them quite a bit like the fiscal cliff negotiations in the United States. If both remain deadlocked at the end of the year, the financial world will face two unprecedented disasters. Though they will not match those of the 2008 credit crisis, they could come close.

European Union finance ministers are locked in battle with the IMF over Greece. Christine Largarde has taken the position many economists have. Greece cannot cut its way to a balanced budget. As a recession chews at its tax base, no amount of austerity can keep up to move toward smaller deficits. Germany continues to complain that Greece could take actions that would cause a deep write-down, not unlike the one of year ago. Perhaps international investors and money center banks would be hurt by this. But so would the perception of Germany as the adult of Europe — one which is important to its own citizens — and voters.

The problem in the United States is so well-known that it hardly bears repeating. If no decision is in place about tax cuts by year’s end and government spending is automatically cut, a recession will ensue. That is the opinion of the Congressional Budget Office and Fed Chairman Ben Bernanke. The bona fides between the two are enough to be convincing.

Greece is obviously a small part of Europe’s financial size, based on gross domestic product. Perhaps a default or exit from the eurozone would badly damage the alliance as write-downs cripple balance sheets of the region’s banks. Plenty of cases say that is not so. In the U.S. there are voices that say an increase in taxes and a drop in federal spending will not be enough to undermine a recovery that is already underway, based on employment, consumer sentiment and housing figures.

The risk that the optimists about Greece and the U.S. are wrong is very great. Can kicking quickly will turn into a train wreck if neither situation is addressed and the both worst cases are eliminated.

Douglas A. McIntyre

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