The Euro at Mid-Crisis
Now that the EU and the IMF have committed €85 billion to rescue Ireland’s troubled banks, European policymakers should start looking ahead more realistically. More denial won't prevent the most likely endgame: a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s.
CAMBRIDGE – Now that the European Union and the International Monetary Fund have committed €67.5 billion to rescue Ireland’s troubled banks, is the eurozone’s debt crisis finally nearing a conclusion?
Unfortunately, no. In fact, we are probably only at the mid-point of the crisis. To be sure, a huge, sustained burst of growth could still cure all of Europe’s debt problems – as it would anyone’s. But that halcyon scenario looks increasingly improbable. The endgame is far more likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s.
For starters, there are more bailouts to come, with Portugal at the top of the list. With an average growth rate of less than 1% over the past decade, and arguably the most sclerotic labor market in Europe, it is hard to see how Portugal can grow out of its massive debt burden.
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