[LINK] "Why Europe can't let Greek economy crumble"

[rfmcdonald]

CBC's Don Pittis makes the case that the rest of the Eurozone has to bail Greece out somehow, in the name of its credibility and that of the wider European Union. He might have a good argument, but if levels of trust between Greece and the rest of the Eurozone are so low and for understandable reasons I wonder if anyone even believes in the possibility of this solution.

When two sides in a financial negotiation are playing chicken, there is always a possibility that both will think the other will give way at the last minute. Accidents do happen.

This time, neither side can afford it.

You can see why the Europeans have been reluctant to cave in. It is a classic case of moral hazard, where, if a person, business or country gets away with something once, there is nothing to stop them from doing the same thing again.

In this case, the idea is that Greeks ran up huge debts. Greeks, through their governments, made deals to borrow even more money to keep their economy afloat. The moral hazard argument would say that if Greeks don't keep to their side of the deal, they should be made to suffer the consequences.

For the EU, the moral hazard case goes far beyond Greece. It is only one of 28 countries in the union. Anything Brussels does for one member country becomes a precedent for what it may be asked to do for other members in the future.

The gloomiest of the Europeans fear a wave of copycat defaults as more countries elect governments to repudiate debts and demand relief.