The euro and the endgameRead the whole thing.
It has not taken long, but increasingly attention is turning to the endgame of the eurozone crisis.
Everyone seems to accept that "the centre cannot hold, things fall apart". So every idea is in play: a break-up of the eurozone, Greece leaving, fiscal and political union, European bonds, a European treasury etc. It is at last being recognised that papering over and pretending cannot continue.
...What has changed is a recognition that Greece needs some debt relief. Almost every economist believes that at some stage Greece will default. It can be now or later. The debt-to-GDP ratio is heading for 170%. There is no way a country can escape that trap, particularly with an economy in recession. So a way has to be found to write off part of the value of the debts.
So a dozen schemes have been on the table... [and if] a solution is found a second Greek bail-out will be launched at a eurozone summit on Thursday. Of course the question will be asked: if Greece gets debt relief why shouldn't other countries? Steps may well be taken to extend the period of the bail-out loans already given to Portugal and the Republic of Ireland - as well as Greece - and reduce the interest rates.
...All of this may buy some time, some relief, but it won't address the wider issue: how to convince markets and investors that Europe has a plan to address its debt mountains at a time of low growth.
Take Italy. How will it find the growth to reduce its debt-to-GDP, which currently stands at 120%? Italy stands perilously close to the edge. All it takes is a 2% rise in its borrowing costs for it to struggle to pay its way.
Which is why so many people leap forward to the endgame.
Some say there is a choice. Europe could take a giant leap towards integration and so all debt would become European debt. It could only do this with fiscal union - and that almost certainly would need the backing of political union.
...Or: Greece is shown the door, offering it a sabbatical from the eurozone, allowing it the flexibility to default and devalue. A couple of other countries may have to follow too, but the core of the eurozone would be protected, and ringfenced. All of these countries could rejoin the single currency later. Nobody pretends it would be easy, but it might be preferable to risking the single currency.
Tuesday, July 19, 2011
For those of you who are keeping up with the euro-zone debt crisis, I strongly recommend reading this piece by the BBC's Gavin Hewitt: