Yesterdays surge in Greek bond yields has added pressure on the nation’s government to activate an EU bailout and accept more spending cuts as the country’s civil servants held a one day strike today to protest against government cutbacks.

The euro continued to fall against both the US dollar and sterling for the fourth day today. Yesterday the single currency dropped 0.66% against the pound closing at GBP 0.86861. Today it touched a low of GBP 0.86547 in trading on the Forex market. The euro fell 0.35% against the US dollar yesterday, closing at EUR 1.33870. Today it touched a low of EUR 1.33302 against the dollar.

Greece’s benchmark 10-year bond yield soared to 8.13% yesterday, its highest level since the single currency was introduced in 1998 and more than double the comparable German rate. Rates rose as it became clear that talks about the aid package would not be finished until days before Greece is due to repay a multi-billion euro loan.

Greece’s finance ministry said the talks with the European Commission and the IMF would take about two weeks, with a joint statement to be issued on around May 15th. On May 19th, Greece is due to repay investors an 8.5 billion euro bond.

Today’s strike, the fourth of its kind this year has forced hospitals and schools to close as well as affecting government ministries. Prime Minister George Papandreou is being criticized by voters who believe the austerity measures his government has enacted are excessive and by investors who believe more measures should still be enacted to cut a budget deficit in excess of 12% of GDP, the largest in the euro zone.

The Greek government said it still plans to cut the deficit by four percentage points this year, though it backed away from a forecast that the shortfall would fall to 8.7%. An EU official said the bloc has always aimed for a four percentage point cut in the budget gap this year. While Finance Minister George Papaconstantinou says he’s “not influenced” by the surge in bond yields, investors are skeptical he can maintain momentum to cut the budget shortfall to less than 3% in 2012.

Euro zone partners have agreed to offer a rescue package of up to 30 billion euro with another 10 billion euro to come from the IMF. However speculation persists that even 40 billion euro might not be enough. On Tuesday, Axel Weber, a member of the European Central Bank governing council, denied reports that Greece might need as much as 80 billion euro to avoid default.

The country needs to raise about 11 billion euro by the end of May, and about another 35 billion euro during 2010 to fund public spending such as public service pensions, and to finance structural reforms.

German Chancellor Angela Merkel steered Berlin on a crash course with fellow Euro Zone members, on Wednesday, calling for certain “troublesome” members to be expelled from the single currency bloc. Mrs. Merkel warned that EU parliament that Europe needs “a treaty framework in which it would even be possible as a last resort to exclude a country from the Euro if it again and again breaks the conditions over the long-term.”

Her harsh remarks come after certain Euro Zone members’, namely Greece, mountain debt crisis have panicked forex investors, causing the Euro to lose over 5% of its value this year against the Greenback.

Mrs. Merkel told the parliament that “We are thinking for the future” and about how to improve rules for the 16-nation Euro Zone. That includes considering “an agreement for the future in which it is even possible as a last resort to exclude a country from the Euro Zone if, in the long term, it again and again fails to fulfill the conditions”, otherwise, according to Merkel “we can’t work together.” While observers quickly dismissed the Chancellor’s proposal as political theater, aimed a shifting the debate away from the debt crisis, forex investors are forced to question, is Germany actually serious in its quest to expel its rule breaking members.

Countries, such as Greece, Portugal, Spain, Ireland and Italy (collectively referred to as the PIIGS), have been milking the benefits of the single currency and monetary policy for years, without any real regard to the consequence of their actions and mounting fiscal debt. Since the creation of the Euro Zone Germany has stood as the strongest member of the 16-currency bloc, providing the majority on the union’s economic support. And such its annoyance with the Greek problem is understandable as if the Euro Zone end of providing loan guaranties other assistance to Greece, the bulk of it would be paid for by Germany. However, this type of change that the German leader outlined would require the unanimous approval of the 27 European members, including those with the worst fiscal track records- in other words those whose heads rest on the chopping block.

Merkel called the Greek crisis, where a budget deficit above 12% of GDP has prompted fears about the government’s ability to pay its debts and the currency bloc’s power to stabilize a struggling member, “the greatest challenge yet to face the Euro” and said it exposed a need for broad new regulations. While she absolutely right that if the Euro Zone wants to survive it needs stricter rules of financial governance, she has gone too far by putting the option of “expulsion” on the table. Besides Greece is not the only country that faces a huge budget deficit, and it is certainly not the only State to break the EU’s allowed budget deficit equivalent to 3% of GDP. Even Germany, regarded as a hawk on budget stringency, has forecasted that its budget deficit will expand to 5.5% of GDP, from 3.2% in 2009- essentially also “breaking the rules”. And this number could turn out to be higher as according to the EU commission, Germany based this forecast on “slightly favorable” economic projections. And hypothetically if this law were too pass, who would decide which country’s get kicked out and which get to stay? How can you give such a power to certain countries, and not others?

Let’s say Germany would get its wish and Greece would be expelled — never mind that the European Central Bank says expulsion is inconceivably impossible and even a voluntary exit is unimaginably complex — Greece would almost certainly default on those bonds. This would lead to unimaginable consequences for German investors, as Deutsche Bank CEO Josef Akcermann reminded audiences yesterday that German claim on Greek debt is worth something like $43 billion. German lenders would get new gaping holes in their balance sheets, in addition to an immediate reduction in the value of the $689 billion of debt they hold in bonds from Spain, Italy, Ireland and Portugal. Beyond that, there’s also the massive benefit the euro has given Germany. Basically, German exporters have locked in competitive advantages vs. 15 other nations that they would not otherwise enjoy if the Italian lira, Greek drachma and Spanish peseta were still around to depreciate.

From its creation, the Euro was driven as much by politics as economics. The single currency founding fathers were inspired by the belief that Europe’s destiny, and strength, lay in a closer economic union. A single currency and monetary policy was the foundation for this belief. So figures were reworked and massaged to enable countries to join. When nations broke the economic regulations in the past, it was overlooked- everyone remain a member of the “club”. But that was back when there was confidence in the Euro, and hence the state of Greece’s or other EU country’s economies had not real impact on Germany. Now that the single currency is spiraling downwards, and the fate of the EU lies on the edge of the edge of the unknown, suddenly Germany does not wish to be associated with these countries anymore. Twelve years ago Germany needed these country’s to create the EU’s political and economic union- it needed these country’s to create a union that would be large and strong enough to rival the Unites State’s economy. But now that these country’s have are hampering this vision, Germany is willing to simply expel them? Does that really seem fair?

The Euro Zone is in a very tough bind, and Germany and even greater one. But instead of wasting time proposing plans that will never pass, and would create more damage than good, the EU leaders should come up with a plan that would solve their disastrous situation, in the near term and the long term, sooner rather than later. Investors (forex) typically have little patience for uncertainty- the longer the 16-currency bloc waits, the faster the Euro will sink.

The Greek budget deficit swept across the financial markets (forex) installing fear in investors that the birth place of democracy could become the Lehman Brothers of Europe. With other PIIGS countries (Italy, Ireland, Spain and Portugal) already showing symptoms of the “debt crisis”, which other European countries are on the cusp of faltering and catching a PIIGS like flu?

Across the British Channel, the U.K has caught the eye of worrisome investors as government debt continues to rise and the economy continues to struggle to fully exit the recession. The U.K budget deficit is roughly the same size as Greece’s, exceeding 12% of the country’s GDP. Britain, almost six times the size of the Greece, is racking up debt faster that than of its peer European nations, as it heads into a critical government election.

However, while the position of the economy is in dire straits, economists feel that Britain’s situation is not nearly as bad as it may seem. They say that unlike the PIIGS, Britain does have some “immunity” factors in its favour: namely the Pound. Whilst all the Euro Zone is tied to one common currency, and hence one monetary policy, the U.K is free to determine its own monetary policy and is not held back nor pushed by any other country. However, late last month, the Sterling plunged to a new 10 month low against the US Dollar. While the British currency managed to recovery slightly, analysts predict the Pound will lose between 20% and 30% of its value once investors turn their attention to Britain, as the government sells a record amount of debt.

The approaching general election further complicates matters, as government campaigning is always a difficult time to bring up spending cuts such as roads and hospitals as well as tax increases meant to minimize the out of control deficit. In addition, fear that neither the Labour party nor the Conservative party will enough seats to hold a majority government would spell utter disaster for the country’s deficit problems- as a minority government would be unable to push key bills and budget regulations through parliament. The lack of a political majority would bring with it anticipated delays to any fiscal austerity programs and a loss of trust for international investors. That has resulted in a vicious circle for the already weakened British pound, with worries about a hung Parliament adding to the effects of the government’s economic stimulus plans.

In January alone, the British government borrowed £4.3billion- ending 17 years of surpluses for the month and putting in on the path of a £178 billion Pound budget deficit this year. Economists have already forewarned that the country is on track to borrow the equivalent of 12.8% of its GDP in 2009/10 – exceeding Greece’s 12.7%., and far above the average 6% for Europe. In total Britain’s GDP ratio is predicted to reach 82% this year, almost double that of two years ago.

So far, Britain has managed to escape too much scrutiny because of its differences from Greece, notably the healthy sovereign credit rating and the fact that much of its debt is long term. However, according to Moody’s Investor Service, the U.K. is moving closer and closer to losing its AAA credit rating as the cost of servicing their debt continues to rise. Currently, it is that credit rating allows Britain to borrow relatively cheaply on global financial markets.

There is no doubt that Britain’s situation is very similar to that of Greece, and the other PIIGS. While Germany and France may not want to help out their flailing EU peers, one way or another at a certain point they will be forced to provide some sort of financial aid package. But who will rescue Britain from its very own Greek Tragedy? As Britain is not tied to the Euro Zone, the rest of the EU does not have to give it aid. Once the ruler of the sea, Britain appears to be drowning, but who will throw it a life preserve?