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French-German divide prolonging Greece's woes

|Includes: iPath EUR/USD Exchange Rate ETN (ERO)

 Even by the EU’s sad standards, eurozone finance ministers’ display of unity on Monday over the Greek crisis proved particularly short-lived. But a deep divide between France and Germany over how and whether to help Greece is accentuating the crisis and increasing the chances for worst case scenarios.

The ministers agreed on Monday at their monthly dinner meeting in Brussels on the broad outline for how the eurozone would extend bilateral loans to Greece if Athens were forced into needing them. However, the ink was barely dry on the communique before the agreement began unravelling with Germany raising the possibility of calling in the IMF and even the possibility that countries could be kicked out of the 16-nation shared currency union.

Germany’s reluctance to pony up any cash for Greece is more about domestic politics than anything else. With an election later this year, German politicians don’t want to be seen sacrificing German taxpayers’ cash to prop up a corrupt and profligate Greek benefits system after Germans worked hard to keep down their deficit levels. Therefore, Chancellor Angela Merkel and her Finance Minister Wolfgang Schauble have been doing everything possible to stall any firm and precise commitments to support Greece with cash. That’s why Schauble pushed the idea of a European Monetary Fund two weeks ago and why Merkel has opened the door to the possibility of calling in the IMF. They are hoping that stall-tactics will be enough to keep Greece solvent until it gets over a key debt rollover hump running through April.

Meanwhile, Nicolas Sarkozy’s France has been pushing for stronger eurozone commitment to Greece. The last thing he wants is for the IMF to have to come in and pick up the pieces in the Greek crisis as it just so happens that his biggest political rival heads the IMF. Shortly after he was elected, Sarkozy exiled Dominique Strauss-Kahn in Washington with the plump job of running the IMF in hope of keeping sharp and respected Socialist out of domestic French politics. However, the move has largely backfired because Strauss-Kahn’s absence in Paris has done little to hurt his ratings, with French opinion polls now ranking him as the most popular French politician. That makes him a formidable rival for Sarkozy if he decides to run in the 2012 presidential elections. That point is likely to borne home as soon as Sunday when Sarkozy’s ruling UMP party is due for a drubbing in regional elections, the last vote before the presidential election.

With Germany and France busy playing domestic politics, Greece is left wondering where its going to get the cash to pay its bills over the next six weeks. That’s why Prime Minister George Papandreou tried to force Germany and France to get serious and come up with coherent positions in time for a summit of EU leaders in Brussels next Thursday and Friday. If they don’t then the markets are probably going to drive up Greek bond yields and ultimately there may be little choice but calling in the IMF for an emergency rescue. And that will be sorry sign that the eurozone is not mature enough to sort out its most pressing problems.




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