May 3 (Bloomberg) -- German Chancellor Angela Merkel said she was right to demand International Monetary Fund involvement in the Greek bailout over the objections of her European peers, wringing previously “unthinkable” budget cuts from Greece.
“This is an ambitious program that contains tough savings measures and on the other hand seeks to improve the efficiency of the Greek economy,” Merkel told reporters in Bonn yesterday. “Three months ago it would have been unthinkable that Greece would accept such tough conditions.”--
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Comment: The question, however, remains, whether Greece will stick to its promises. Past experience doesn't bode well. Nevertheless, the Greek drama may have strengthened those in the rest of PIIGS that advocate more drastic measures of austerity. In the long run, the sovereign debt problem is not solved and won't be solved anytime soon. It has become a global phenomenon and goes way beyond Europe. It is inherent to the mechanism of modern politics to move towards the very limit and beyond of debt capacity. When the financial system is at the verge of breakdown, politicians will step in with bailouts so that the necessary adaptation gets postponed again and again. Instead of a deep but short recession, we get a prolonged stagnation which in the end will become stagflation with the risk of turning into hyperinflation.
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