By: Dr. Mike Campbell

In retrospect, the EU and the IMF may be regretting paying the €110 billion bailout package to Greece in tranches. As a condition of the loan, Greece must be seen to be adhering to the terms of the loan by making progress on its debt reduction plans. This means that before each tranche is released, EU and IMF officials have to sign off on the progress that Athens is making. No problem there, you may think, but if the officials are not satisfied with the progress, the next tranche of funding won’t be paid and, hey presto, Greece will default. The process causes an unwanted focus on the Greek situation every time a payment is due when the whole idea of the loan was to ensure that Greece wouldn’t default in the first place. The speculation invariably casts a shadow over other heavily indebted nations such as Italy and Spain and helps to nudge up borrowing costs.

The leaders of Germany and France have assured everybody that Greece is an “integral” part of the Eurozone in a further move to calm the markets and dampen persistent rumours that Greece will be forced to leave the Eurozone. For its part, Greece has assured everybody that it is determined to implement its deficit reduction plans as agreed under the bailout plans.

A second bailout package of a further €109 billion for Greece has been agreed in principle, but the deal still requires ratification by a number of Eurozone members. At the end of the day, it is in the group’s interest that the Euro thrives and that confidence is restored, so my bet is that the deal will be agreed. In the next to impossible scenario that Greece were forced out of the single European currency, the Euro would die the death of a thousand cuts as, one by one, weaker members were forced out, destroying the credibility of the concept and doing immense harm to the key European economies of Germany and France: this simply will not be allowed to happen. In the interim, the Euro is weakening making EU (Eurozone) goods more competitive in the global market just when demand is weakening – no bad thing.