Who’s next? The Eurozone in an Insolvency Trap
There seems to be no end to the debate about the stability and the future of the euro. Following in the footsteps of Greece and Ireland, Portugal has now admitted that it is unable to sort out its finances on its own. With the help of the new European Stabilization Mechanism the European Union is hoping to prevent other states from following suit, and in the long term to create a more stable situation. But is it going to work?
In the current Spotlight Europe, "Who's next? The Eurozone in an Insolvency Trap," Robert B. Vehrkamp of the Bertelsmann Stiftung points out that the danger of new crises is greater than ever before. The Stabilization Mechanism may well turn out to be the "nucleaus of a European economic government." But in the short term, the author believes, "the eurozone is in an insolvency trap." Since the Stabilization Mechanism is only due to become operational in 2013, there is a growing "threat of speculative attacks by the markets" on interest rates.
The author believes there is only one logical strategy response. "Those who wish to secure the future of the euro with the help of the European Stabilization Mechanism must listen to its logic today (and not tomorrow)." Debt restructuring of obviously over-indebted countries of the eurozone needs to be tackled now. As far as the markets are concerned, policymakers do not in fact have much of a choice.