GREEK RESPITE GIVES THE E.U. A BREEDER / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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JANUARY 2, 2010.

Greek Respite Gives the EU a Breather

By SIMON NIXON

Greece closed the year more upbeat, after two torrid months at the hands of bond investors. Moody's ended up downgrading Greek debt by less than anticipated, making it more likely the bonds will continue to meet European Central Bank collateral requirements. The Parliament also passed an emergency budget to reduce the fiscal deficit from 12.7% to 9.1% next year.

That meant some respite for Greek government bonds. The euro zone also should take advantage of the lull to devise a road map for what it plans to do if a member of the single currency defaults.

The temptation, in case of a default, would be to force the member state to seek support from the International Monetary Fund. The euro zone has clear rules against bailouts, designed to minimize moral hazard. Using the IMF, experienced at designing and enforcing bailout packages, would send a powerful signal to other countries and reinforce the discipline central to the single currency's success.

However, that would go against the grain of 50 years of European Union development, which has stressed ever-closer union and solidarity. And the shock could trigger contagion to other overindebted countries.

If that makes it more likely the euro zone would rescue a member state, it is far from clear what form that would take. Would funds be provided centrally or by individual governments? How would the burden be spread across member states?

Greece's woes are a reminder that the euro's architects ducked key issues. Resolving them likely would require countries to cede new powers, including allowing the EU to sell its own bonds and enforce a cap on borrowing by member states. A crisis would at least force such tough decisions.

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