Reversing Europe’s Renationalization

At the onset of the euro crisis, a eurozone breakup was inconceivable: assets and liabilities were so intermingled that a breakup would have led to an uncontrollable meltdown. But, as the crisis has progressed, the eurozone financial system has been progressively reoriented along national lines.

NEW YORK – Far from abating, the euro crisis has taken a turn for the worse in recent months. The European Central Bank managed to relieve an incipient credit crunch through its long-term refinancing operation (LTRO), which lent over a trillion euros to eurozone banks at one percent. This brought considerable relief to financial markets, and the resulting rally obscured underlying deterioration; but that is unlikely to last much longer.

The fundamental problems have not been resolved; indeed, the gap between creditor and debtor countries continues to widen. The crisis has entered what may be a less volatile but potentially more lethal phase.

At the onset of the crisis, the eurozone’s breakup was inconceivable: the assets and liabilities denominated in the common currency were so intermingled that a breakup would cause an uncontrollable meltdown. But, as the crisis has progressed, the eurozone financial system has been progressively reoriented along national lines.

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