The Looming Greek Default

French, German and Greek leaders held crisis talks via teleconference on Wednesday about shoring up Greece’s tattered economy and calming unsettled markets. Greece is once again on the brink of default. Greece pledged that it would meet all obligations. Meanwhile, two of France’s biggest banks – who loaned the Greeks money – had their credit ratings slashed today.

European Commission President, Jose Manuel Barroso, speaking before the European Parliament, pressed for deeper political and economic integration as a way to save Greece — the euro.

“Only by acting together, and maximizing the benefits of our inter-dependence, will Europe reach its true potential and be able to act as more than the sum of its parts,” he said.

Barroso also said he would re-introduce the idea of eurobonds as a way forward. The bonds would allow the 17 member eurozone to borrow money collectively. But that would also require a degree of centralized fiscal oversight that doesn’t currently exist.

There’s another school of thought that says just let Greece default. Let them leave the eurozone.

Olli Rehn, the EU’s Economic Affairs Commissioner, said it’s a bad idea.

“A default and/or an exit of Greece from the eurozone would carry dramatic economic and social and political costs,” he said.

But some are starting to wonder if the bigger cost might not be staying in the eurozone. In Germany, many are tired of being viewed as “Europe’s ATM.” And while some German politicians pay public lip service to the idea of saving Greece, there are also hints that German banks are preparing for what they see as an inevitable Greek default, and what the next scenario might be.

Johan Van Overtveldt, author of a forthcoming book called “The End of the Euro,” suggests it could be Germany exiting the eurozone, followed by countries like Holland, Austria and Finland.

Van Overtveldt said the whole idea of the euro was flawed from the beginning, and that he’s shocked that it’s taken this long for the eurozone to reach this crisis point.

“That has been the structural problem with this whole euro monetary union from the beginning. It has always been first, second and third a political initiative, where the regard for economics or economic conditions that need to be fulfilled have always been a sideshow.”

In other words, without full political union, according to Van Overtveldt, there’s no way to have a coherent, workable monetary union.

Now, with these weaknesses exposed, investors are jittery about Europe, and the roiling markets reflect that.

Still, some think the eurozone could be saved, but that it would require Germany’s Chancellor, Angela Merkel, to step up big time.

Peter Spiegel, Brussels Bureau Chief for the Financial Times, said Merkel has a decision to make.

“Is she going to allow the euro and the eurozone to collapse under her watch? Or is she going to take the politically dangerous point and say this is in German national interest, I know you don’t like it German voter, but we have to do this to save the euro,” Spiegel said. “I think we’re going to eventually see Merkel turn the corner, because otherwise I’m not sure how the eurozone pulls itself out of the current spiral.”

For its part, the Obama Administration has been pushing for the EU to rescue Greece. Johan Van Overtveldt said there’s a good reason for that.

“If we go to a decision, which is very likely, of one kind of default by Greece, that will certainly have an impact on American banks, and will have a huge impact on markets in general.”

Van Overtveldt added that the US concern is also geo-political. China has been quietly offering to buy up European debt of late, he says, and that makes the US uneasy. Underscoring American concern, US Treasury Secretary Timothy Geithner will meet with eurozone finance ministers in Poland on Friday.