Mon Jun 20th, 2011 at 10:59:54 AM EST
Writing in the FT, Wolfgang Munchau, who seems to have morphed from high priest of the conventional wisdom to prophet ranting in the desert over the last few years, explains [Google link] why he thinks that the logic of recent events is for the eurozone to survive.
He's basically arguing that the EU will eventually have to do the right things for Greece: "partial debt forgiveness, a eurozone bond and a small fiscal union" or face Greek default and all the fallout from that. He's betting that Merkel doesn't want to be known by history as the East German who destroyed the EU. The EU leadership are cowards and they're far too cowardly to actually find out what happens when it all burns down.
I expect that we are still on course for a second loan package, to be agreed either this week or in July. It would really be best if they could do this now to end the uncertainty that has led to an increase in the bond spreads, mostly importantly in Spain. Now that Ms Merkel has removed the biggest obstacle to an agreement, there is really no reason to delay the decision any further.
Unfortunately, the loan programme as discussed by the EU and the IMF is inadequate. For a start, the assumptions it makes about the scale of private sector participation are too optimistic. It is also irresponsible to set aside a sum for privatisation receipts in the financing package itself. It would be much more credible to use the receipts for debt reduction. I expect a third package to be necessary some time next year. Instead it would be better to agree a cast-iron package until 2014 that leaves no room for interpretation.
If Ms Merkel were really serious about ending the Greek crisis, as she promised on Friday, she would now have to capitulate on several more fronts. An announcement of partial debt forgiveness, a eurozone bond and a small fiscal union would end the crisis. We are not there yet. But the lesson of last week is that the political economy of the eurozone is driving us in that direction.
Of course, all the delay and dithering has and will make the problem worse before it gets better and increases the suffering of the real people in the real economy. Munchau also argues that austerity can't possibly work and "reform" is needed - whatever that's code for this week.