July 28, 2011
Eurozone leaders’ agreement last week on a new Greek rescue plan marked a big step forward from the previous agonisingly piecemeal approach. The distance to a truly comprehensive solution, however, remains bigger. Although the political deadlock was indeed broken, leaders have glossed over the details that are gradually coming out, and many still seem oblivious to how much those details matter.
If eurozone policymakers really believe their stated conviction that Greece can service its debt at reasonable interest rates, they should have no qualms about standing behind Athens: there is money to be made for taxpayers in stepping in where supposedly irrational markets fear to tread. Their timidity in doing so betrays their uncertainty, naturally fuelling that of private investors. The inconsistencies in the eurozone’s thinking are now probably the single most important cause both of peripheral sovereign’s inability to return to market and of the growing risk of further contagion.
Those inconsistencies remain in place in the new package, which, while going further than what came before, is not comprehensive in either size or scope.