Tuesday, May 18, 2010
For a solution to the euro crisis, look to the states
May 18, 2010
The Greek budget crisis has made it clear that something must be done to limit fiscal deficits in eurozone countries. The attempt to do so with the group's Stability and Growth Pact has failed. Although the pact "requires" all eurozone countries to keep deficits below 3 percent of gross domestic product, not one of the 16 members is in compliance. The average deficit of the eurozone countries exceeds 7 percent of GDP. Something new is needed.
The structure of the Economic and Monetary Union (EMU) that created the euro actually encourages members to run large deficits. A country with its own currency would see that currency deteriorate and its interest rates rise if it sold large amounts of debt to global investors. But because EMU countries share a currency, there has been no market feedback to warn when a country's deficit is getting dangerously high. Since Greek bonds were regarded as a close substitute for the euro bonds of other countries, the interest rate on Greek debt did not rise as the country increased its borrowing -- until the market began to fear default.
Posted by Yulie Foka-Kavalieraki at 11:44 PM