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Euro: Is the end game near?
Fri, 27 Jul Pre-Open

For almost two years, the financial press has been filled with news regarding the global debt crisis. Most of this attention has been focused on the Eurozone, and in particular the prospect of a Greek default. Europe is a train wreck and on the brink of a major financial collapse. A debt problem that began with Greece now endangers the entire Euro zone. This dramatic situation is the result of a Eurozone system which, as currently constructed, is thoroughly broken.

In a sign that Europe's debt crisis is deepening, Italy's borrowing costs edged higher, Greece was facing a 1930s-style depression and its austerity measures were said to be faltering. And now it seems Spain might need a full blown bailout. The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what's available in existing emergency funds.

Though Spain may be hogging the limelight now, Italian borrowing costs are only slightly lower. Were Spain to be taken out of the markets, investors would focus on Italy, which would soon also need a bailout. It is an open question whether the EU funds and IMF have enough between them in theory to cover Spain and Italy's needs over the next few years. If not, then according to Jim O'Neill, chairman at Goldman Sachs Asset Management, Eurozone has maximum two years left to survive in its current form, though the reality is probably far less than that.

However there is one solution to this problem. It is called a Eurobond. Under this, all member nations would underwrite and finance a single bond issue to help finance troubled economies in Italy, Greece and Spain. But Germany is not interested in this idea. They claim that it will be unfair on their part to ask their taxpayers to shoulder other countries' debt burdens.

It is clear what is needed. A European fiscal authority that is able and willing to reduce the debt burden of the periphery as well as a banking union. Debt relief could take various forms other than Eurobonds, and would be conditional on debtors abiding by the fiscal contract. Withdrawing all or part of the relief in case of nonperformance would be a powerful protection against moral hazard. It is up to Germany to live up to the leadership responsibilities thrust upon it by its own success.

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