There was once a point when I’d have encouraged the European Union to bail out the Greeks in order to save the Union. But that was before the irrationality of the situation set in.

Last week, the EU, Greece and Greek Sovereign debt holders came to an agreement: Greece would get a bailout package to the tune of more than $140 billion and Greek bondholders would take a 50% haircut on their holdings.

Essentially, this was a pre-packaged bankruptcy that would save the Greeks from an actual “default” in the real sense.

But then, last Monday, in a shocking move, the Greek Prime Minister, George Papandreou, announced that he wanted to have a referendum on the proposed package. The news caused panic and global markets sold off.

[ad#Google Adsense 336×280-IA]To put it bluntly, Papandreou was covering his ass for the sake of posterity.

He wanted this to be seen as the decision of the Greek people instead of his own, in turn, putting pressure on the conservatives who are criticizing him.

But it’s the conservatives who want to stay in the EU, so he knew they’d buckle and agree to the plan – which is what they did. For now.

Time for Greece to Take it or Leave It

If Greece were to vote against the bailout, it would result in a massive financial meltdown within the EU and the euro.

Unless, of course, the EU was ready for it. And that’s exactly how they should proceed.

The EU should dump Greece from the Union and from the euro. They need to send a strong signal that this is what will happen if you reject an austerity package.

So far, the EU’s alluded to it, but haven’t specified what the fallout will be. They need to do this immediately, otherwise the market will price in the worst outcome – a collapse of the euro.

Furthermore, any move like this shouldn’t just be “talk” – something the Europeans are quite fond of. They should put forth a formal resolution that clearly specifies the actions that will be taken. This should be the framework for any default by any state.

In short, the Europeans need to lift the cloud of uncertainty surrounding their decision-making prowess. And investors need to know the outcome, or the markets will remain volatile.

A move to formally dump Greece now would finally show the EU’s resolve and bring closure to the situation. Subsequently bringing major relief to the markets.

Most importantly, it would set a precedent for other EU countries looking to play political games.

Bottom line: If Greece fails to agree to the new package, its situation would be much worse going forward. What the country needs to do now is grow up and take its medicine. And if it doesn’t, the EU should kick it out.

Ahead of the tape,

— Karim Rahemtulla

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Source:  Wall Street Daily