We last checked in on Greece in the direct aftermath of the country's election, where New Democracy, the pro-bailout party eked out a slim win. Since then, ND has managed to overcome the first potential hurdle, forming what looks to be a stable government. For now.

Which means it's time to move onto the next set of negotiations that could destroy the euro zone and plunge the world into a miserable recession: the renegotiation of the Greek bailout. The expectation was that if the Greeks voted the "right" way -- that is to say, voted for New Democracy, which wanted to largely abide by the bailout, rather than for Syriza, which wanted to kick Germany in the shins and walk away -- the Powers That Be in the euro zone would reward the Greeks by loosening the terms of the agreement.

The renegotiated terms could include more time for Greece to hit its deficit targets, lower interest rates on their loans, more money to bolster their budget, or even some kind of external stimulus. France is open to any or all of those. Germany, the Netherlands, and some of the other Northern European nations say they are not.

If the Northern Europeans prevail, the odds that Greece will manage to keep to tis timetable are low, and the odds that New Democracy and its coalition will survive are infinitesimal. Voters do not tend to like parties that aren't able to deliver anything more than a ringing endorsement of crushing poverty at the hands of more powerful countries.

The Northern Europeans know that, of course. So you might ask why they seem so intent on cracking Greece in half. One plausible story I've begun to hear is that an increasing number in the euro zone actually want to drive Greece out. The idea, basically, is that Greece is such an unsalvageable basket case, and its economy is so much weaker than anyone else's, and its governments have been so much more dishonest and difficult to deal with, that solving Greece's problems would mean rewarding irresponsibility while not solving them would mean an endless cycle of crisis. At some point, it's better just to cut them off and cauterize the wound.

At that point, having shown how serious they are about punishing wayward members, the euro zone can extend more support to the remaining, and more responsible, countries in the currency union. Having made an example out of Greece, and forced everyone to stare into the abyss, they will both have more support for saving the rest of the periphery and less fear that other countries will think they can flout the rules without consequences.

But, of course, the euro zone can't be seen to actually cut any countries off. All they can do is make it impossible for Greece to remain. Which appears to be what they're doing. It almost goes without saying, of course, that if this is the plan, the chances for it to go awry and wreck the world economy as the euro zone collapses under a series of unmanageable runs are very, very high.

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Top story: Europe ponders its next step

The euro zone is divided over easing Greece's bailout terms. "Eurozone finance ministers sparred over whether to allow more time for Greece to hit tough deficit targets mandated in its €174bn bailout, with representatives from most triple-A northern countries vowing no leeway while the French minister indicated his government was open to such a shift...Some EU officials have said the Greek programme could be put back on a realistic track by giving Athens more time to hit its budget targets and adding about €20bn to the bailout, but new money is anathema in Germany and in the Netherlands, which is in the middle of a high-stakes national election where anti-bailout parties are gaining in the polls." Peter Spiegel in The Financial Times.

The IMF is challenging Germany's approach to the euro crisis. "The International Monetary Fund on Thursday challenged Berlin’s game plan for pulling the eurozone out of its crisis by advocating a series of short-term fixes that the German government has resisted. Christine Lagarde, the IMF chief, said eurozone leaders needed to prevent the single currency from deteriorating further by considering the resumption of bond buying by the European Central Bank and pumping bailout money directly into teetering banks...In addition to the short-term measures, Ms Lagarde also called on the eurozone to complete a fiscal and banking union in the longer-term, structures that she said should include a eurozone-wide bank deposit guarantee scheme and 'gradual but limited' mutualisation of eurozone sovereign debt - both measures also resisted by Berlin." Peter Spiegel and Alex Barker in The Financial Times.

Spain released stress tests of its banks. "Spain has sought to ease investors’ fears that it needs a full-scale international bailout of its economy by publishing two 'stress tests' showing that Spanish banks need between €16bn and €62bn in new capital. The estimates of how much extra capital its banks might need fall well within the sum of up to €100bn that Spain requested for its financial system from its eurozone partners this month. Fernando Restoy, deputy governor of the Bank of Spain, said the numbers were 'a long way from the maximum that the eurogroup agreed to make available to Spain." Victor Mallet and Ralph Atkins in The Financial Times.

The ECB is poised to relax its collateral rules. "The European Central Bank is poised to relax its collateral rules for central-bank loans in a bid to ease strains on commercial banks in Spain and the rest of Southern Europe, according to people familiar with the matter. ECB officials have broadly agreed to make more types of securities, including certain mortgage-backed and asset-backed securities, eligible as collateral at its lending facilities...A loosening of collateral rules would provide a lifeline to struggling banks in Spain, still dealing with the aftermath of that country's burst property bubble." Brian Blackstone in The Wall Street Journal.

Greece's new government ruled out massive public-sector layoffs. "Greece's new three-party coalition government on Thursday ruled out massive public-sector layoffs, a move that could help pacify restive trade unions but could set it on a collision course with international creditors demanding substantial cuts in public spending. The country's new government also confirmed that it aims to revise the terms of its latest, €173 billion ($218.6 billion) bailout--but without putting at risk its presence in the euro zone...Cutting the size of the public sector has been a top demand by Greece's creditors--the European Union, European Central Bank and International Monetary Fund--to reduce costs and help Greece meet its budget-deficit targets needed for the country to get more financing. So far, Greece has laid off just a few hundred workers and failed to implement a so-called labor reserve last year, which foresaw slashing the public sector by 30,000 workers." Nektaria Stamouli, Stelios Bouras, and Costas Paris in The Wall Street Journal.

European banks may be artificially boosting their health. "Regulators and investors are concerned that some European banks are artificially boosting a key measure of their financial health, a worry that is further eroding market confidence in the Continent's banks...At issue is the way banks calculate and disclose their capital ratios. The ratios are comprised of certain types of equity expressed as a percentage of the bank's 'risk-weighted assets'--a fuzzy measure that an increasing number of regulators and investors fear is subject to abuse by banks." David Enrich and Max Colchester in The Wall Street Journal.

Business activity in the eurozone contracted sharply. "Business activity in the euro zone contracted sharply in June, a closely watched survey showed, underscoring the currency bloc's deepening economic malaise as it confronts an escalating debt crisis along its southern fringe. A pronounced drop in German manufacturing activity raised fears that the region's largest economy, and primary financial backer, is beginning to buckle from the region's debt crisis. The euro's recent slide, which helped boost exports in German and other economies two years ago, is unlikely to provide much support now, economists and business leaders said...The euro-zone purchasing managers' index was 46 in June, unchanged from May's three-year low and well below the break-even threshold of 50 between expansion and contraction, according to data-services firm Markit, which compiles the figures based on a survey of purchasing executives." Brian Blackstone in The Wall Street Journal.

JOHNSON: The problem with the euro is the exchange rate itself. "Most current policy discussion concerning the euro area is about austerity. Some people, particularly in German government circles, are pushing for tighter fiscal policies in troubled countries (i.e., higher taxes and lower government spending). Others, including in the new French government, are more inclined to push for a more expansive fiscal policy where possible and to resist fiscal contraction elsewhere...But both sides of this debate are missing the important issue...The underlying problem in the euro area is the exchange rate system itself - the fact that these European countries locked themselves into an initial exchange rate, i.e., the relative price of their currencies, and promised never to change that exchange rate. This amounted to a very big bet that their economies would converge in productivity - that the Greeks (and others in what we now call the 'periphery') would, in effect, become more like the Germans." Simon Johnson in The New York Times.

Top op-eds

1) CHAPMAN: Inflation is the least of our worries. "Remember the guy who ran for governor of New York as the candidate of the Rent Is Too Damn High Party? We need a new one, called the Money Is Too Damn Tight Party. It would get my vote. But the vote it needs belongs to Federal Reserve Chairman Ben Bernanke, and he isn't giving it. On Wednesday, the Fed indicated it would stick to its current course, declining to embark on another 'quantitative easing' that would inject a lot more money into the economy. He and many other people have awful memories of high inflation from the late 1970s and early 1980s. No one wants to repeat that experience. But inflation-phobes resemble someone stranded in the desert without water who spends his time frantically searching for a life preserver...Could inflation make a comeback? Sure. So could the Soviet Union. But until it does, we should deal with dangers that are not imaginary." Steve Chapman in Reason.

2) KRUGMAN: Privatization of public functions doesn't work. "You really need to see it in the broader context of a nationwide drive on the part of America’s right to privatize government functions, very much including the operation of prisons. What’s behind this drive?...If you think about it even for a minute, you realize that the one thing the companies that make up the prison-industrial complex -- companies like Community Education or the private-prison giant Corrections Corporation of America -- are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn’t any market here, and there is, therefore, no reason to expect any magical gains in efficiency. And, sure enough, despite many promises that prison privatization will lead to big cost savings, such savings -- as a comprehensive study by the Bureau of Justice Assistance, part of the U.S. Department of Justice, concluded -- 'have simply not materialized.'" Paul Krugman in The New York Times.

3) NUNES: Medicare and Medicaid should be replaced by a healthcare debit card. "The fundamental mistake of ObamaCare's architects is that they refused to recognize the systemic failure of government-provided health-care. Medicare and Medicaid had begun malfunctioning long before Nancy Pelosi bribed and bullied Congress into approving President Obama's health-care bill. Now we need to begin assembling the components of a replacement plan that works better than ObamaCare and more efficiently than the current system. To that end, I am introducing the Choice in Healthcare Act, which will create a voluntary, 10-year pilot program for a new health-care delivery system, beginning in June 2013. Geared toward low-income individuals and seniors, this simple plan will replace participants' Medicare and Medicaid benefits with roughly equivalent funds put on a debit-style 'Medi-choice' card. Participants can then use their card to buy the health insurance of their choice on the open market." Devin Nunes in The Wall Street Journal.

4) BERWICK: Obamacare does cost control the right way. "Some people believe that the only way to address this problem is to shift costs to consumers. Obamacare has a far better approach: reduce health-care costs by providing better care and promoting better health. The law does this by targeting the underlying drivers of high health-care costs: It supports and rewards caregivers for preventing complications of care, like health-care-associated infections, which saves both lives and money. The CMS, for example, has set ambitious goals to reduce complications that, if met, would save 60,000 lives and $35 billion in just three years. The law also emphasizes preventive care and cracks down hard on waste and fraud. Last year the government recaptured a record $4 billion. It fosters transparency, so everyone can tell the best performers from the rest. Rather than paying for volume, the law helps us pay for value...The Obama reform will control health-care costs the best possible way: by helping patients get and stay well." Donald Berwick in The Washington Post.

5) LIEBMAN: Republicans shouldn't reject Obama's jobs plan. "There is a strong consensus about what the immediate challenges facing our economy are: first and foremost, a continued lack of demand as a lingering result of the recession. We also know the areas where this has caused the most damage, including deep state and local government layoffs and continued weakness in the construction sector. And we have a good idea of what tools work best to address these problems. The president has put forward a plan that uses exactly these tools. Nine months ago, President Obama outlined his American Jobs Act and independent economists said it would create as many as 1.9 million jobs. While Congress has acted on some of his proposals--most notably, extending payroll tax cuts that provide $1,000 for an average family--it left more than a million jobs on the table...Republicans in Congress are the only thing that is preventing these measures from putting more Americans back to work right now." Jeffrey Liebman in The Wall Street Journal.

Top long reads

Paul Krugman and Robin Wells on the Obama era:"When Obama was elected in 2008, many progressives looked forward to a replay of the New Deal. The economic situation was, after all, strikingly similar. As in the 1930s, a runaway financial system had led first to excessive private debt, then financial crisis; the slump that followed (and that persists to this day), while not as severe as the Great Depression, bears an obvious family resemblance. So why shouldn’t policy and politics follow a similar script? But while the economy now may bear a strong resemblance to that of the 1930s, the political scene does not, because neither the Democrats nor the Republicans are what once they were...These changes in America’s political parties explain both why there has been no second New Deal and why the policy response to the prolonged economic slump has been so inadequate."

60s nostalgia interlude: Nina Simone plays "How It Feels To Be Free" live at the Montreux Jazz Festival.

Got tips, additions, or comments? E-mail me.

Still to come: Hiring isn't happening; Medicaid reform could stay no matter what happens; the Senate nears a student loan deal; the Senate passes the farm bill; and a baby tiger is really, really, cute.


Bernanke could be preparing for bigger follow-up action. "It is possible, based on Mr. Bernanke’s past actions, to make some educated guesses about how the Fed chairman might be thinking strategically. Mr. Bernanke has tended to move boldly and decisively in his time as Fed chairman when he has had conviction about a problem...When he has lacked conviction, though, his moves have tended to be very deliberate and have unfolded in step-by-step fashion over months, not days...The Fed said in its official statement Wednesday that it was prepared to take additional action if the job market doesn’t improve. Mr. Bernanke repeated that sentiment over and over again at his press conference. Given how he has behaved in the past, one has to believe he really means it. If he develops more conviction that the recovery is under serious threat, bold follow-up action now looks like a real possibility. And if the recovery miraculously improves, he has lost nothing." Jon Hilsenrath in The Wall Street Journal.

Moody's cut the credit ratings of 15 big banks. "Already grappling with weak profits and global economic turmoil, 15 major banks were hit with credit downgrades on Thursday that could do more damage to their bottom lines and further unsettle equity markets. The credit agency, Moody’s Investors Service, which warned banks in February that a downgrade was possible, cut the credit scores of banks to new lows to reflect the changing nature of the industry since the financial crisis...Citigroup and Bank of America, which have struggled to fully recover from the financial crisis, were among the hardest hit. After two-notch downgrades, their credit ratings stand just two levels above junk, a sign of the difficult business conditions they face. Banking executives argued on Thursday that the new ratings did not reflect the safeguards and changes that they had put in place in recent years." Peter Eavis and Susanne Craig in The New York Times.

@asymmetricinfo: Holy downgrades, Batman

@BCAppelbaum: Moody's: We predict a major bank could lose $2 billion -- maybe more -- any day now.

Job openings aren't resulting in more hiring. "When the U.S. economy began to strengthen earlier this year, companies cut back on layoffs and posted more job openings. What they didn't do was actually step up their hiring. Now the recovery appears to be faltering again, giving companies even less incentive to hire. That could spell further trouble for job growth in months ahead, especially if companies go back to slashing payrolls. There are signs this already is happening. Private employers laid off 71,000 more workers in April than the month before. New claims for jobless benefits, which had been falling steadily since last fall, have trended upward in recent weeks. On Thursday, the Labor Department said the four-week moving average, which smooths out weekly volatility, reached its highest level last week since December...A report last week from global staffing firm ManpowerGroup found that just 21% of U.S. companies plan to add workers in the third quarter, barely above the year-earlier level." Ben Casselman in The Wall Street Journal.

The Senate wants a report on how the sequester will be implemented. "The Senate has agreed to require the Office of Management and Budget and the Pentagon to detail how federal agencies will implement a deep automatic budget cut set to take effect in January, as Congress begins to brace for dramatic reductions that are scheduled to occur as a result of last summer’s deal to raise the debt ceiling. The request came in an amendment to the nearly $1 trillion farm bill and was a compromise between Republicans -- who had wanted to hear more about defense cuts -- and Democrats, who asked for details about domestic reductions as well." Rosalind Helderman and Ed O'Keefe in The Washington Post.

Home resales fell last month. "Sales of previously owned homes in the U.S. fell in May, suggesting that economic headwinds and a lack of available lower-priced properties may be holding back housing market's recovery...Existing-home sales decreased 1.5% from a month earlier to a seasonally adjusted annual rate of 4.55 million, the National Association of Realtors said Thursday. Realtors' chief economist Lawrence Yun said sales of lower prices homes, those costing $100,000 or less, are leading the decline, even while sales of houses priced at $250,000 or more are on the rise. 'That I attribute to lack of inventory of lower-end homes,' he said, as opposed to a lack of demand tied to a slowing economy. But compared to a year earlier, May sales were 9.6% higher, and it was the eleventh consecutive month of sales gains compared with a year earlier...The median sales price in May was $182,600, up 7.9% from a year earlier. That was the highest median price since June 2010." Eric Morath and Josh Mitchell in The Wall Street Journal.

Tiger cubs are very cute interlude: The Minnesota Zoo has a new Amur tiger cub.

Health Care

Billions of dollars of other parts of Obamacare could be up in the air. "By the end of June, the court is expected to decide whether some or all of the Obama administration’s health care law is constitutional. While speculation has focused on how the decision would affect the future of the nation’s health insurance market, little attention has been paid to the tens of billions of dollars in federal money appropriated for a host of other provisions in the law. Exactly what happens to the money for those programs if the Supreme Court decides to overturn the entire law is unclear. Tens of billions of dollars could easily vanish, especially depending on the outcome of the November elections. Congress and the president could always decide to cut the funds for any of these initiatives, especially given pressing political and budgetary realities...All told, at least $13.7 billion in federal money has already been spent, according to estimates from the Kaiser Family Foundation." Reed Abelson in The New York Times.

Some states will keep Medicaid reform even if Obamcare is overturned. "Even if the Supreme Court overturns the Affordable Care Act’s Medicaid expansion, some state Medicaid officials plan to move forward with reform plans that already are being put into place. Without the Medicaid expansion, there’ll be 16 million to 20 million people who won’t be added to the Medicaid rolls starting in 2014 -- and billions in federal funding for the coverage expansion won’t be there. But some state Medicaid officials said they’re already working toward changes that can move ahead, regardless of whatever the Supreme Court decides...Washington state, one of a few states to take advantage of the law’s early Medicaid expansion option, figures it’s protected financially in the short term. That’s because the early expansion was covered by an 1115 demonstration waiver CMS granted in January 2011. And the state would look to extend that if the court overturned the Medicaid piece." Jason Millman in Politico.

People with pre-existing conditions have a lot at stake. "No other group of Americans faces higher stakes in the impending Supreme Court ruling on the Affordable Care Act than those with pre-existing conditions. The law, once its major provisions take effect, would prohibit insurance companies from turning people away or charging them more because they are sick. In exchange, most Americans would be required to have insurance, broadening the base of paying customers with an infusion of healthy people. Those who did not buy insurance would be subject to financial penalties. The Government Accountability Office estimates that 36 million to 122 million adults under 65 have a pre-existing condition. As many as 17 million do not have insurance...Experts are divided on what the ruling will bring for this group of Americans. If the mandate that everyone buy coverage is struck down, the Obama administration and the insurance industry say that the protections for people with pre-existing conditions should be, too." Sabrina Tavernise in The New York Times.

@petersuderman: The Supreme Court is all... LUKE... I AM YOUR... .... ... ....

@pourmecoffee: No Obamacare ruling today. Justices want to finish reading all your blog comments before ruling.

Domestic Policy

John Bryson has resigned as commerce secretary. "John Bryson has resigned as commerce secretary, telling President Obama in a letter that the seizure he suffered recently 'could be a distraction' to the president’s focus on rebuilding the U.S. economy...Commerce Department Deputy Secretary Rebecca M. Blank has been running the department on an interim basis since last week. As part of her new duties, she visited Poland this week for a business summit. Asked if Obama would nominate a replacement for confirmation in an election year, White House Press Secretary Jay Carney said only that Obama has 'a lot of confidence' in acting director Blank. 'Dr. Blank has served in this position already and done it well,' Carney said. Bryson was the newest member of the Obama Cabinet and served the shortest tenure, having earned Senate confirmation last October. He succeeded Gary Locke, who had stepped down to serve as U.S. ambassador to China." Ed O'Keefe and Jia Lynn Yang in The Washington Post.

The Senate is near a deal on student loans. "Top senators from both parties are closing in on an agreement to prevent student loan rates from doubling on July 1...Senate Majority Leader Harry Reid (D-Nev.) and McConnell have taken charge of the negotiations and a deal could be announced as soon as Friday, sources say, although early next week seems more likely...The list of options Reid and McConnell are considering include one favored by Reid that would tweak pension payment contributions by employers and increase premiums paid by businesses for Pension Benefit Guaranty Corp. coverage. The leaders also are discussing ideas that House and Senate GOP leaders offered to the White House. Those proposals include a 0.4 percent increase in federal employee retirement contributions over the next three years, or a combination of offsets that would reduce overpayments to Social Security recipients, revise certain Medicaid taxes and stop subsidizing the interest that accumulated on certain student loans." Seung Min Kim and Manu Raju in Politico.

@markknoller: If Congress doesnt act by July 1, millions of students will rack up an extra $1000 in student loan debt.

Adorable animals playing musical instruments interlude: A cat plays guitar during a earthquake.


The Senate overwhelmingly passed the farm bill. "The Senate approved a sweeping new farm bill on Thursday that would cost nearly $1 trillion over the next 10 years...The bill passed with overwhelming bipartisan support, 64 to 35. It now goes to the House, where it faces a much tougher road because conservative lawmakers want to make deeper cuts in the food stamp program, which serves about 45 million Americans...Although the bill is known as the farm bill, the majority of the spending, about $80 billion a year, goes to the food stamp program. The Senate bill would cut a total of $23.6 billion from current spending levels, including about $4.5 billion from food stamps, but senators rejected several proposals that would have made even deeper cuts...The House Republican budget introduced earlier this year by Representative Paul Ryan, Republican of Wisconsin, would reduce food stamp spending by about $134 billion over the next decade and turn the program into block grants for the states." Ron Nixon in The New York Times.

A mixup set back efforts to approve Keystone XL. "A mix-up over amendment language has robbed House Republicans of their latest opportunity to vote for greenlighting the Keystone XL oil pipeline. Reps. Lee Terry (R-Neb.) and Connie Mack (R-Fla.) withdrew their amendment to a GOP energy bill that would have approved the pipeline after realizing that key language was missing, a Terry aide told POLITICO...In the rush to get the amendment approved, four lines were left out that 'added another layer of approval that we did not intend,' the aide said, blaming the mistake on 'human error.'...The Terry legislation upon which the amendment was based would mandate that the Federal Energy Regulatory Commission issue a permit for construction and operation of the pipeline within 30 days of receiving TransCanada’s application. If FERC does not act on the application within the 30-day time frame, the amendment would deem the project approved." Andrew Restuccia in Politico.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.