Europe at the Tipping Point – Today is Crunch Day

If the European Union fails to agree today to a plan that is perceived as effective by the markets, we may see an economic meltdown in some Eurozone countries.

The costs of borrowing may rapidly rise for countries like Greece, Italy and Spain and we may be headed for exits from the Eurozone and defaults of national debt.

On the one side, there are those countries, including France, that seek a more robust intervention by the European Central Bank (ECB) to issue Eurobonds backed by all members, and those, notably Germany that perceive that as moral hazard.

Instead, Germany’s focus is on tighter fiscal union, tighter EU control of sovereign policies, and punishments for countries that misbehave. However, other countries such as Sweden think the time is not right for treaty changes.

One option being exercised is for the International Monetary Fund to come in and help the countries in trouble. As such, the ECB will provide $240 billion to the IMF for this purpose.

The thinking goes that the IMF would impose needed austerity programs on the countries that borrowed from it and the ECB would be paid back by the IMF, who would be a lender of first resort in the problem countries.

This would leave private lenders most at risk, having to write down their debt values as the countries essentially go though a ‘bankruptcy’ proceeding.

In any event, time is of the essence and the hope, not least in the Obama administration, is that Eurozone leaders – including the stubborn Merkel of Germany – realize it.

If they do not, or cannot act, an fiscal abyss awaits.

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  • Jenny

    It’ll never work…Last week, the UK backed out of the broad agreement for closer integration of the Eurozone. They know it won’ work – the exact reason they stayed out of the Eurozone to begin with.

    They (Merkel, Sarkozy etc.) cannot seem to take decisive-enough action to stop the rot.  A penny of prevention is better than a pound of cure…