Friday, January 29, 2010

Eurozone: the End of the Beginning

In its “Charlemagne’s notebook” titled “A Greek bailout, and soon?” The Economist’s journalist writes:

“the question asked about a bailout of Greece used to be: are European Union governments willing to do this? Now, I can report, the question among top EU officials has changed to: how do we do this?”

Since heads of government cannot wait “forever” to take decisions, it means that it is going to be made in “the next few months, at most”. And European leaders will be meeting for an informal economic strategy summit in Brussels on february 11th, while the amount of aid required is not that important compared to the GDP of the 16 countries together.

With the current crisis, the governments of the eurozone already gave up, de facto, the application of the Growth and Stability Pact deficit criteria. Now they prepare to renege on the agreed obligation not to bailout a bankrupt member state. There has been much talk among economists of the moral hazard resulting from bank bailouts, but States are not immune either to that type of perverse incentives. We should watch out for interesting developments that could follow within the zone.

As Winston Churchill said in more serious circumstances, this is not the beginning of the end, but it is the end of the beginning for the euro.

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