Paul Lachine

From Pain to Gain on the EU Frontier

Governments in the eurozone’s periphery, including Spain and Italy, now face a dilemma: they must undertake structural reforms to increase their long-term potential growth, but at the cost of even greater short-term pain. The debt crisis will end only when they have shown that they have understood this and accepted the inevitable sacrifices.

BRUSSELS – The first act of the eurozone debt drama was about whether any European Union member country could ever become insolvent. It ended when the highest EU authority, the European Council, officially recognized in late July that Greece does need a reduction in its debt obligations.

But that acknowledgement of reality does not end the drama. The second act will be about restoring growth prospects for the EU periphery, which will pose an even more difficult challenge.

The key problem is simple: until 2008, these countries enjoyed a long boom based on cheap and plentiful credit, which allowed them to finance large current-account deficits. But any import boom creates a misleading impression of the local economy’s productive capacity.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/JDH0US8;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.