The ECB could solve the problem by acting as buyer of last resort for all of the debt shunned by financial markets, but it, too, is understandably reluctant to assume the risk — and it is this standoff that has unnerved markets and endangered the euro’s viability.
Managing a debt overhang has always been one of the toughest challenges for policymakers. In antiquity, the conflicts between creditors and debtors often turned violent, as the alternative to debt relief was slavery. In today’s Europe, the conflict between creditors and debtors takes a more civilized form, seen only in European Council resolutions and internal ECB discussions.
However, it remains an unresolved conflict. If the euro fails as a result, it will not be because no solution was possible, but because policymakers would not do what was necessary.
The euro’s long-run survival requires the correct mix of adjustment by debtors, debt forgiveness where this is not enough and bridge financing to convince nervous financial markets that the debtors will have the time needed for adjustment to work. The resources are there. Europe needs the political will to mobilize them.
Daniel Gros is director of the Center for European Policy Studies.
Copyright: Project Syndicate