There are two main schools of thought on what may happen next with Europe’s debt crisis. Some well-informed people strongly believe that everything will work out just fine, and without much of an economic slowdown. Other, equally well-informed people believe just as strongly that the euro area will break apart in a traumatic manner. When it comes to predicting Europe’s future, not many people occupy the middle ground.
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The ECB has, in the jargon of the day, a big bazooka. It can provide a great deal of cheap credit to Italy and other troubled European sovereigns. If Italy doesn’t need to borrow from private markets for the next few years, the reasoning goes, an economic recovery can take hold. There may also be sensible changes at the level of euro-area governance, including perhaps a greater degree of fiscal union. And Germany could throw some fiscal stimulus into the mix.
My colleagues at the Peterson Institute for International Economics, Fred Bergsten and Jacob Kirkegaard, have a new paper: “The Coming Resolution of the European Crisis,” which argues that such outcomes constitute the most likely scenario.
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But Europe’s problem isn’t just that some countries have the wrong exchange rate, and no way to adjust it within the existing system. The main issue is that governments borrowed heavily during the good times, which are most definitely at an end.
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When the country that devalues has borrowed heavily in a foreign currency -- as the euro effectively is for Italy at this point -- there is a sovereign debt crisis and usually a restructuring of the government’s obligations. Avoiding some version of this in the euro area will be hard.
http://www.bloomberg.com/news/2012-01-23/europe-debt-crisis-still-likely-to-end-badly-commentary-by-simon-johnson.html
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The ECB has, in the jargon of the day, a big bazooka. It can provide a great deal of cheap credit to Italy and other troubled European sovereigns. If Italy doesn’t need to borrow from private markets for the next few years, the reasoning goes, an economic recovery can take hold. There may also be sensible changes at the level of euro-area governance, including perhaps a greater degree of fiscal union. And Germany could throw some fiscal stimulus into the mix.
My colleagues at the Peterson Institute for International Economics, Fred Bergsten and Jacob Kirkegaard, have a new paper: “The Coming Resolution of the European Crisis,” which argues that such outcomes constitute the most likely scenario.
...
But Europe’s problem isn’t just that some countries have the wrong exchange rate, and no way to adjust it within the existing system. The main issue is that governments borrowed heavily during the good times, which are most definitely at an end.
...
When the country that devalues has borrowed heavily in a foreign currency -- as the euro effectively is for Italy at this point -- there is a sovereign debt crisis and usually a restructuring of the government’s obligations. Avoiding some version of this in the euro area will be hard.
http://www.bloomberg.com/news/2012-01-23/europe-debt-crisis-still-likely-to-end-badly-commentary-by-simon-johnson.html
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