Euro and beyond
Fact is, the extent of debt that has been run by (among others) the PIGS economies have made their countries highly vulnerable. Not that all the others are in a good shape, but the PIGS economies epitomizes the problems the profligate economies (that cannot self correct) face.
Surely, Greece, as a nation is in clear need for a bailout. Default (even a technical one) would be catastrophic. CDS spread of Greece has skyrocketed to 400 basis points plus. As a rough estimate, about €300 bn worth of Greek bonds are outstanding in the global market. Overall, as the sovereign rating of the vulnerable countries (Portugal and Spain are also facing increasing pressure) take a beating, the interests rates would start to rise. And the problem will not be restricted to the few countries only. Even the biggies would be affected. In case of Germany, for example, in the past about 6 months, the CDS spread more than doubled. As per the BIS data, total exposure of the German banks in the PIGS economy (Ireland, instead of Italy) is close to a quarter of their total exposure in developed Europe and nearly 15% of their total global exposure. Meaning, the impact of the vulnerable economies would be increased interest rates, something that the entire region can ill afford at this point in time, when recovery is of paramount importance.
On the other hand, bringing the deficits down (which should be the prime focus) substantially in a shorter period of time (as is expected of Greece or, for that matter, already implemented by Ireland) to enable these economies to meet the requirements to be part of the Eurozone, can lead these economies straight into recession as the Government has to stop supporting the economies fairly soon.
Not surprisingly, there is now increased clamour about a dual currency in the Eurozone (a strong Euro or the existing one and a weak Euro to be adopted by the weaker economies). Not that the Eurozone policy is to be solely blamed. A significant body of academic research shows that since euro’s introduction in 1999, not only have the periphery countries of the Eurozone not achieve real convergence towards the union’s core countries, they have actually diverged further. Euro-participation provided periphery countries with a false sense of financial security preventing them from pursuing unpopular yet necessary fiscal and structural reforms. And they are paying the price for it.
