Euro zone crisis may be close to resolution

January 28, 2011

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

DAVOS, Switzerland — The euro zone crisis may be close to resolution. There is certainly optimism among policymakers at the World Economic Forum in Davos that a comprehensive deal — involving more discipline by peripheral nations and more help from rich nations — could be put together in coming weeks. If so, the hot phase of the crisis could be over and even Greece would have a fighting chance of getting out of the woods.

There is still no deal. But the stars seem to be coming into alignment. Germany, the zone’s paymaster, clearly realises that it has a strong interest in the single currency holding together — and will do what is needed to make that happen. Peripheral nations also seem to be willing to go an extra mile to give Berlin enough air cover to sell further help to the German people.

The basic bargain would involve more generous terms for loans to indebted countries, especially Greece, balanced by hard-and-fast promises not to run up debts in the future. The countries are discussing some form of “debt brake”, a provision embedded in the German constitution which forces it to balance its budget in the medium term. Such self-denial could, indeed, be a healthy mechanism for all countries to adopt.

Meanwhile, two changes could be made to make even Greece’s debt burden — which is officially forecast to peak at just under 160 percent of GDP — more bearable. The first would be to buy back chunks of its debt in the secondary market at a discount and pass the benefit onto Athens. If, say, a quarter of its debt could be acquired at a 20 percent discount, the peak ratio would fall by 8 percentage points. Not huge, but helpful. More importantly is the idea of cutting the interest rate on the debt. If the country was able to fund itself at below 5 percent, the annual interest payment would be below 8 percent of GDP.

Even with such a package, Greece would still face a massive uphill struggle to boost its competitiveness. It would still need to push through aggressive moves to tackle rampant tax evasion. And it would still need to punish those who have looted the public purse in recent years — otherwise, the general population will not be willing to endure the years of hardship ahead. But there is a narrow path the country could tread back to long-term health.

It will also be important to stop further dominoes falling, especially Spain. Madrid had a golden opportunity earlier this week to draw a line in the sand by coming up with its own comprehensive solution for its troubled savings banks, the cajas. It flunked it by saying that a maximum of 20 billion euros would be needed — significantly less than the market consensus. But it is not too late to remedy the error. Spain’s euro zone partners should pressurise it to make crystal clear that there is more money if needed. If a proper clean-up of the region’s troubled banks is also part of a comprehensive solution, the euro zone will indeed be able to look forward to better times.


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Fixing the debt helps but how are they going to make Greece, Portugal, Ireland and Spain competitive? Greece and Ireland ramped up their prices during the ‘good’ years to a level that has caused a fall in tourism and agriculture, which are major foreign currency earners. Portugal’s economy was flat in the good years and Spain still has third world levels of unemployment. Debts are only the symptoms – not the disease. Unless something is done to boost their economies (traditionally devaluation) then I fear that their problems will not go away.

Posted by pavlaki | Report as abusive

The Eurozone crisis is not close to resolution. All the maneuverings of the Euro Elite amount to nothing more than a putting off of the inevitable.

They are all so shell-shocked by the true scale of the problem they can’t seem to acknowledge, grasp or comprehend it.

Irelands population is just under 4.5 million. As of June 2010, there were only 1,859,500 in paid employment. If Ireland has to avail itself of the full 85 billion Euro bailout, that amounts to a debt of €45,711 for every person in paid employment.

That amount has to be extracted via taxation, and that is in addition to the amount of taxation the government already collects in the normal course of events. Add to that the taxes needed to fund the interest burden on the 85 billion. At 6% that’s another 5.1 Billion PA.

The average salary appears to be about €36,955.

Sure businesses pay tax too, but i think you would have to regard that as fixed income because any meaningful rise in corporate tax rates would lead to an exodus of firms to eastern Europe.

Capital is fleeing the Irish banking system at the rate of €40 Billioin a month and people are emigrating at the rate of 40,000 pa.

Welcome to la-la-land where six impossible things must be believed before breakfast.

It’s like a big ticking bomb waiting to go off. The Euro Elite are all cunningly forming themselves into a neat line abreast, with the bomb at their backs quietly ticking away. Some of them are staring skywards, whistling nervously, some are chatting to each other importantly, all of them are hoping that the world can’t see past them at what is behind their backs.

Tick, tick, tick…

Posted by Stigmata | Report as abusive