The ongoing sovereign debt crisis has revealed major cracks in the foundation of the single currency area. France and Germany feel that one way to consolidate the eurozone and avoid future crisis is to move towards a new club of ‘core’ euro countries, and abandon the rest. But, is it really the solution?
Issue Date - 08/12/2011
The sovereign debt crisis has just claimed two of Europe’s most venerable leaders – George Papandreou, the third member of the Papandreou family to serve as the Greece’s Prime Minister, and Silvio Berlusconi, the famous Bunga Bunga organiser who dominated the Italian political scene for nearly two decades. The reason is simple. Markets have lost faith in policymakers’ ability to do what it takes to carry out serious structural reform, bring down debt, and stimulate growth in their respective countries.
. In fact, this lack of political ability to deal with the escalating debt crisis has not only increased the investors’ nervousness, but has also put a question mark on the future of the eurozone. The truth is that risks of the EU splintering have really mounted, to an extent that the German Chancellor Angela Merkel and the French President Nicolas Sarkozy have already acknowledged at the recent G20 summit (in Cannes) for the first time that they might abandon Greece to its fate, a devastating shift from leaders who had always insisted for the eurozone to remain intact at any price. There is more. Talks are doing the rounds that they are even contemplating a new club of core euro countries – abandoning the rest – that can live within the rules.
No doubt, European policymakers are certainly under tremendous pressure to bring growth back on track without compromising on austerity measures. But then, is it logical to support creation of a two-speed Europe and shun the development of the single currency area which supports heterogeneous nations?
A closer look at the numbers and one can easily understand the real problem. While yields on 10-year government bonds in the eurozone’s third largest economy, Italy, have officially crossed the breaking point of 7% (the highest in the eurozone history and above the level at which the fiscally troubled Greece, Ireland and Portugal were forced to seek bailouts), interest rates remain above 3.6%, 4.51% and 3.58% on French, Spanish and Austrian bonds respectively. This makes the situation really worrisome as credit rating agency Moody’s analysis suggests that borrowing costs even above 6% could endanger the sustainability of public finances. For instance, while in Greece, it took less than a month to seek an international bailout once the yield on 10-year government bonds passed the psychological 7% level, in Ireland, the yields moved from 7% to 9% in about four weeks before the country sought external help after its yields breached that level.
Issue Date - 08/12/2011
The sovereign debt crisis has just claimed two of Europe’s most venerable leaders – George Papandreou, the third member of the Papandreou family to serve as the Greece’s Prime Minister, and Silvio Berlusconi, the famous Bunga Bunga organiser who dominated the Italian political scene for nearly two decades. The reason is simple. Markets have lost faith in policymakers’ ability to do what it takes to carry out serious structural reform, bring down debt, and stimulate growth in their respective countries.
. In fact, this lack of political ability to deal with the escalating debt crisis has not only increased the investors’ nervousness, but has also put a question mark on the future of the eurozone. The truth is that risks of the EU splintering have really mounted, to an extent that the German Chancellor Angela Merkel and the French President Nicolas Sarkozy have already acknowledged at the recent G20 summit (in Cannes) for the first time that they might abandon Greece to its fate, a devastating shift from leaders who had always insisted for the eurozone to remain intact at any price. There is more. Talks are doing the rounds that they are even contemplating a new club of core euro countries – abandoning the rest – that can live within the rules.
No doubt, European policymakers are certainly under tremendous pressure to bring growth back on track without compromising on austerity measures. But then, is it logical to support creation of a two-speed Europe and shun the development of the single currency area which supports heterogeneous nations?
A closer look at the numbers and one can easily understand the real problem. While yields on 10-year government bonds in the eurozone’s third largest economy, Italy, have officially crossed the breaking point of 7% (the highest in the eurozone history and above the level at which the fiscally troubled Greece, Ireland and Portugal were forced to seek bailouts), interest rates remain above 3.6%, 4.51% and 3.58% on French, Spanish and Austrian bonds respectively. This makes the situation really worrisome as credit rating agency Moody’s analysis suggests that borrowing costs even above 6% could endanger the sustainability of public finances. For instance, while in Greece, it took less than a month to seek an international bailout once the yield on 10-year government bonds passed the psychological 7% level, in Ireland, the yields moved from 7% to 9% in about four weeks before the country sought external help after its yields breached that level.
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