Monday, August 22, 2011

They still don’t get it

by Charles Wyplosz


August 22, 2011

The Eurozone crisis is accelerating dangerously, bringing us to the brink of what would be history’s biggest ever financial rout. The spectre of the 1930s, including competitive devaluations and Eurozone break up, is getting dangerously relevant. This revised column argues that last week’s policy changes are not sufficient. Getting ahead of the crisis will require a guarantee for the entire stock of Eurozone debt – either by the ECB, or via some sort of Eurobond scheme.

In this crisis, Eurozone leaders’ motto seems to be “too little too late”.

They got it badly wrong the first weekend in May 2010.

Having announced that they had saved Greece, financial markets said “not good enough”. The next weekend they came up with a more substantial plan, but even this proved to be too little too late.

After months of living in denial, Eurozone leaders finally recognised that Greece was not going to be able to restart borrowing on its own. They came up with another plan. On 21 July 2011, they got it badly wrong again. Financial markets are again said “not good enough”.

On August 16 Chancellor Merkel and President Sarkozy held a widely-trumpeted “summit” to announce decisions that were either irrelevant or misguided. Stock markets around the world said “not good enough”. Even more ominously, the interbank market is seizing up, as it did in 2007 on the way to the Lehman disaster.


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