The acceptance of two key reform laws by the Greek parliament last week has resolved the immediate crisis and has given us the time to design a truly sustainable solution to the problems of the eurozone periphery.
Markets and voters in donor countries have to be convinced that European Union and International Monetary Fund programmes give a real chance of a return to market funding in the foreseeable future. Voters in countries currently implementing very tough austerity programmes have to see some light at the end of the tunnel. Critically, firebreaks must be devised to ensure that, if one country’s programme is blown off course, this will not cause contagion to others.
Most economists agree that, at current growth rates and those foreseeable in the medium term, interest rates under the eurozone’s European financial stability facility (EFSF) and the EU’s European financial stability mechanism (EFSM) are too high. As a result, the programmes are perceived by markets to result in unsustainable debt dynamics. Even worse, the examples of Ireland and Portugal suggest that once market interest rates significantly exceed the high rates in the EFSF, they may spiral out of control. Investors then expect countries to enter programmes where rates will be lower, but also to lose access to market financing for an extended period.
