Thursday, December 2, 2010

Simon Johnson on Eurozone Debt Crisis


In other words, any one member of the euro zone can veto a country from being determined merely illiquid, thus cutting it off from cheap and endless credit (from the European Central Bank or European Stability Mechanism or any window to be named later). So now Germany effectively has a veto, as do other fiscally austere countries including Estonia (from Jan. 1, when it becomes the 17th member of the euro zone).

Most likely we will witness the creation of an Austere Coalition (actually a modified Hanseatic League) of Germany, the Netherlands, Austria, Finland, Estonia and a few of the smaller countries. Ending forever what is charmingly known as moral hazard — the prospect of soft bailout money — is an admirable goal. But getting there under current conditions is going to be rocky, because that new regime implies that prominent countries need to have less total debt and a longer maturity on their debt than they do now.

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