Steering Clear of the Euro Precipice

ATHENS – Renewed turbulence in the eurozone bond market underlines the need to reappraise the policies now being pursued in order to overcome Europe’s sovereign-debt crisis. Indeed, the recent election results in France and Greece, reflecting a much broader anti-austerity mood, leave Europe’s authorities with little choice.

The European Union, the European Central Bank, and private-sector lenders have spent more than €1 trillion over the past two years, but the eurozone remains in no better shape today than in the autumn of 2009, when the full scale of Greece’s fiscal problem was revealed. Meanwhile, the eurozone’s recession is deepening and unemployment is rising.

Moreover, skepticism about the eurozone authorities’ and leading powers’ determination and/or competence to ensure the currency’s viability is increasing systemic risk. For example, the European Investment Bank now inserts a drachma clause in its loan deals with Greek enterprises.

The same message is conveyed by the worries recently expressed by the Bundesbank with regard to the build-up of so-called Target 2 balances. In case of a breakup of the eurozone, these balances cause losses for the Eurosystem and member states’ central banks. Indeed, many eurozone central banks reportedly have reduced their holdings of euro reserves, seeking to diversify into non-traditional currencies.