Vox
5 September 2011
The Eurozone crisis moved into phase 2 this August when the contagion spread to Italian debt, Spanish debt, and most EZ banks. Radical ECB actions prevented a disaster. This column argues that the ECB emergency policies are unsustainable politically and perhaps legally. The only policy combination that EZ leaders could agree on quickly enough involves political cover for ECB bond buying in exchange for national fiscal reforms of the German “debt brake” type.
IMF Chief Christine Lagarde made phase 2 official: "Developments this summer have indicated we are in a dangerous new phase" (Lagarde 2011).
- Phase 1 was the Eurozone (EZ) periphery;
- Phase 2 is the EZ core (Gros 2011).
It is now possible that more Eurozone nations will need bailouts and Europe will fall into a Lehman-size recession (Wyplosz 2011).
This changes everything. Eurozone leaders must wake up and get a grip on the situation before it tumbles out of control. They’ve been sleepwalking since May 2010, so it may take a stock market crash to stir them to action – and the stock-market alarm clock looks set to go off soon.
The crisis – phase 1 and 2 – turns around perniciously entwined bank and government debt problems (Wyplosz 2011, Eichengreen 2009).
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