Too European to Fail
BERLIN – Among investment bankers, there is renewed speculation about the possibility of a country leaving European Monetary Union – or being pushed out. Rating agencies have downgraded Portugal, Greece, and Spain, owing to their poor prospects for economic growth and weak public finances. Ireland has been assigned a negative outlook and could soon suffer a downgrade as well.
With fears mounting that one or another euro-zone country may default, yield spreads on government bonds between EMU countries have reached record highs. For some time now, Greek ten-year government-bond yields have been about 300 basis points above German yields. This is a sign that investors now see a significant risk of a Greek default or of Greece exiting from EMU and redenominating its government bonds.
But the panic that EMU may disintegrate is overdone. Rather than a default and subsequent exit from the euro zone, the member states are more likely to overrule a fundamental principle of EMU and bail out a fellow member state.
We hope you're enjoying Project Syndicate.
To continue reading, subscribe now.
Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.
Already have an account or want to create one? Log in