Acknowledging the limits of austerity, several initiatives attempt a European resolution. Special European facilities, along with the IMF, lend money at below-market interest rates, which reduces the extent of austerity required. However, the facilities’ resources are dwindling and they certainly would not be sufficient if Spain and Italy were to seek support. The ECB’s announcement of a new program to purchase sovereign bonds has lowered market interest rates, but — even with that decline — many countries’ long-term interest rates will most likely remain higher than their growth rates for the next several years.
More ambitious pan-European efforts are embodied in various Eurobond proposals. These schemes imply socialization of debt — taxpayers elsewhere in Europe would share a country’s debt burden. These proposals, once in great vogue, have receded. Not surprisingly, the political opposition to such debt mutualization was intense. Given that perpetual austerity is untenable and others in Europe can only do so much, without robust growth the options will narrow quickly. As a result, much now hangs on the ECB’s actions — and how long they will be sufficient to maintain a truce with financial markets.
Perhaps the Portuguese time-buying strategy points the way ahead, but time does eventually run out. If buying time is not enough, will there finally be a greater call on bondholders to share the pain?
Ashoka Mody is a visiting professor of International Economic Policy at the Woodrow Wilson School of Public and International Affairs at Princeton University.
Copyright: Project Syndicate