Wall Street Journal
March 24, 2011
A couple of months ago, the euro zone appeared to be within sight of a halfway-convincing solution to its debt problems. Under this solution, the strong would help the weak keep afloat long enough to correct key weaknesses in their economies, in return for permanently ceding a degree of control over their policy making to stop a repeat of the current crisis. Today, it seems a lot further away.
What has come out of the past three months' negotiations is so far short of the hoped-for "Grand Bargain" that the prospect of a disorderly default has become much more realistic. It shores up the liquidity positions of the troubled states marginally without doing anything to address their solvency issues, and financial markets are starting to price in post-2013 restructurings, making it more likely the whole edifice will collapse even earlier.
The ability of peripheral states to implement further austerity is visibly weakening at the very moment that politics in countries such as Germany and Finland is constraining their governments from making any more concessions.
Tax collection in Greece is falling far short of what the government promised the European Union and the International Monetary Fund. In the first two months of this year, it was down 9.2% from a year earlier. It was supposed to be up 8.5%.
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