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Eurozone must embrace the pain of debt restructuring

First published: Financial Times, 26/05/2010

How can we get out of the debt crisis that is tearing through the eurozone, and stalking the UK, US and other countries? The answer is infinitely more complex than the European potpourri of liquidity, bad asset purchases, and arbitrary capital and market controls.

There are three inter-related shocks going on, all of which are sapping the appetite for risk. First, the two-year-old financial crisis has captured and constrained the balance sheets of governments, in addition to those of banks and households. It is compromising European banks because of the size of their claims on debtor governments and on weak sectors, such as Spanish real estate.

Second, the euro system faces an existential crisis. To preserve its integrity, the EU would have to go for full fiscal integration. But this would entail the subjugation of national parliaments, and a substantial wealth transfer from Germany. The more likely alternative is, in effect, a tougher stability and growth pact with enforceable penalties, though this will make it even harder for debtor nations to avoid the “depression” that’s heading….more