The crisis that has engulfed the European Union (EU) is about much more than the euro. The euro will not be safe until Europe answers some fundamental questions that it has run away from for many years. At their root is how its nations should respond to a world that is rapidly changing around them. What will it do as globalisation strips the West of the monopoly over the technologies that have made it rich, and an ageing Europe starts to look increasingly like the western peninsula of a resurgent Asia?
The euro zone still has the capacity to stop this run on its banks and governments. As a block, it is less indebted than America and its public-sector deficit is lower. It has the money to fortify its banks against the default of Greece—and Portugal and Ireland, if need be. And it is minded by the European Central Bank (ECB), which can in principle stand behind those vulnerable governments by buying their debt in unlimited quantities on the secondary market. But the EU has repeatedly failed to put forward a convincing euro rescue.
2. Forbes – Nouriel Roubini, the famed NYU economist dubbed Dr. Doom for his ultra-bearish predictions, argues that without the ECB engaging in QE (drop rates down to zero and massively purchase bonds) and a strong stimulus program from Germany, the European Union will not survive.
The argument appears to have been that Italy, and Spain, face a problem of liquidity, unlike their battered fellow PIIGS which also face a problem of solvency. Italy does have a primary surplus and, even though unproductive, counts with a working economy. But, Roubini argues, once an illiquid but solvent country loses market credibility, and is practically pushed out of global markets by widening spreads, its debt dynamic becomes unsustainable and the country itself becomes insolvent.
According to the Financial Time’s James Mackintosh, Rome’s finances can be sustained for about a year at current, and slightly higher rates.
Italy would need to maintain at least a 5% primary surplus to finance its debt, Roubini believes.
The only solution, then, is a restructuring of debt, “that will cause significant damage and losses to creditors in Italy and abroad” and won’t even restore growth and competitiveness.
The only way to stop the upcoming disaster, according to Roubini, is quantitative easing. The ECB would have to drop interest rates to zero, effectively helping to depreciate the currency, and begin massively buying up Italian and peripheral debt. The euro would fall to parity with the dollar, Roubini says, and Germany and other “core” countries would have to implement fiscal stimulus plans to compensate for the fall in aggregate demand caused by austerity in peripheral nations.