European exit needs money but mainly leadership

The current European crisis has several ingredients of an emerging market debt crisis. Some countries entered the euro with the illusion of enjoying the benefits of low price finance forever. This chimera disappeared when the ECB did not act as a lender of last resource of the economies experiencing “sudden stops”. The lack of fiscal coordination did not allow easy answers. The conundrum now is how to find a socially viable solution for those countries with liquidity or solvency problems. Let me to suggest three possible exits. One, they should continue with permanent fiscal consolidation. This alternative seems to be completely inadequate. The sizeable adjustments do not allow credible policies. Investors fly out and refinancing alternatives evaporate. The limited rescue packages and fiscal austerity experiments have always failed. They cannot curb expectations. Two, they might leave the euro and default their debts. Returning to their currencies does not seem possible either. ¿Who would like to hold a drachma in his pocket? Three, EU might arrange a common debt market that secures access to the members in trouble. Current situation has some similarities with the Latin American debt crisis. There is no possible individual way out. Creating a European bond market not only requires significant resources but also a clever political decision from the big countries. A structural mistake cannot be paid only by the people.

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