Europe faces a critical juncture on Thursday – one that may determine not only whether the euro will survive, but whether the global economy will be once again plunged into turmoil. To an economist what needs to be done is simple and clear: Greece’s debt has to be brought to a sustainable level. That can only be done by lowering the interest rate that Greece pays, lowering its indebtedness, and/or increasing gross domestic product.
The problem facing the Europe is not so much economic as political. It is easy to see what should be done. If it issues eurobonds – supported by the collective commitment of all the governments – and passes on the low interest to those in need – debts are manageable. Europe can access capital at low interest rates; after all, its collective debt to GDP ratio is actually better than that of the US. The resolution of this crisis is easily within grasp. It is not a matter of economics. It is only a matter of political will.
As Europe stands at the precipice, it is time to end brinkmanship and political squabbles. Continue reading »