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With key European officials in crucial talks with the Greek government at the start of this week, the next round of Greek bailout funding is firmly in focus.   The Greek situation has prompted some serious discontent from European voters, and this was perfectly expressed in Germany where Angela Merkel is beginning to feel the heat.  

Merkel’s Christian Democrats experienced another crushing electoral loss in the German state elections this weekend, which created more political uncertainty surrounding the future of the euro – not to mention Merkel’s own shelf-life as leader of the German government.

Guest post by Jeremy Cook of World First

Despite Greek protestations that they should not be help entirely responsible for the crisis, there’s no doubting that the country remains firmly at the heart of the problem, and also the potential solution. Europe’s ability (or inability as it stands) to find a sustainable and sensible resolution to the Greek debt problems will be a key indicator as to how this situation will play out as we enter the final phases.

The contagion risk, not only to the periphery, but the core economic powerhouses of France and Germany remains acute. In fact, the risk is as high as it’s ever been. The ‘protective cushions’ which were set up by the ECB have proved to be ineffective and you can see from the credit default swap markets that investors are getting more and more worried about the core.

The cost of French and German default insurance has doubled since the beginning of July as the fears over their respective banking systems have increased. In the same period Italy’s is up 144% while Spain’s sits at 38%.

It all adds up to an uncertain future for the single currency. The breakup of the single currency (into either a core currency one for the periphery, or with everyone returning to their pre-unification status) is a plan that nobody really wants to talk about, but there is every chance that it will be way that this Greek tragedy comes to a conclusion.

Jeremy Cook is chief economist at foreign exchange brokers, World First

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