After a long and costly delay, European officials’ narrative about the debt crisis is changing. This is the good news. The bad news is that Europe still lacks the political and technical leadership needed finally to catch up with this damaging crisis. As a result, it will soon be forced to consider radical options.
Europe needs a better solution that covers debt sustainability, access to markets and growth. It has two options. It could opt for greater fiscal union where cost-effective guarantees and transfers, rather than just loans, would stabilise the region’s debt dynamics through the aggressive use of a unified European balance sheet. Or it could chose to restructure the debt of the weak peripherals, while countering other collateral damage and restoring conditions for growth. At some stage, this could even involve a country taking a sabbatical from the eurozone in order to regain the policy flexibility needed to restore competitiveness.
Neither of these approaches is easy or pleasant to implement. But the alternative of continuing to muddle along with a discredited approach would have even higher costs, and would quickly undermine the institutional integrity of the eurozone as a whole. It is crunch time for Europe. Its leaders must act fast. Continue reading »