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Saturday 19 Aug 2017 | 00:49 | SYDNEY
Saturday 19 Aug 2017 | 00:49 | SYDNEY

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17 November 2010 14:26

Two recurring themes in my posts over this year have been sovereign debt woes and the travails of the eurozone.  Now attention is once again focused on the debt–stressed economies of the European periphery: Portugal, Ireland, Greece and Spain, or the PIGS (sometimes Italy gets included as well, to give the alternative PIIGs).

The respite provided by the joint IMF–EU US$1.05 trillion bailout for Greece back in May has proved to be only temporary, as markets have turned jumpy again.  The immediate trigger seems to have been last month's EU summit which threatened bondholders with losses, as the resultant fears of debt writedowns triggered a sharp increase in bond spreads for Ireland, Portugal and Greece.  But the problems go beyond that.

Investors are also contemplating the likely consequences of the truly nasty economic and political situation now facing some of these economies. Much of the recent focus has been on Ireland, which has been suffering an extremely painful period of post-crisis austerity and where prospects are for things to get even worse, as the country's wrecked banking sector drags the rest of the economy down with it.

Ireland's woes have had consequences elsewhere. Portugal in particular has been in the firing line, too, with the country's Finance Minister warning recently of the dangers of contagion. Meanwhile, Greece's fiscal position has turned out to be even worse than expected.

As a result of all this, European policymakers are now contemplating the need for an extended set of bailout packages.

What does this latest bout of market turmoil tell us'

  • It reminds us that the economic outlook for much of the euro-area’s periphery remains decidedly grim.
  • It also confirms that the Great Sovereign Risk Shift still has a fair way to run, as the likelihood of sovereign default is now extremely high.
  • And it is revealing some significant strains in intra-EU relations.  There's reportedly growing annoyance with Germany over the destabilising consequences of the push to bail–in bond holders.  And markets were again spooked by rumours that Austria was going to block financial support for Greece.

Where does this leave the eurozone overall' We still have the choice between those who think that the whole project is doomed and those who stress that it is all–but–impossible for a country to quit the euro. Both arguments have quite a bit to recommend them.

My own view has been that although the economic logic tends to push for the first conclusion, when it comes to the European currency project, it's typically been the case that political forces have dominated economic ones. I still think that's right. Note, however, that this view certainly does not preclude a restructuring of the euro project — indeed, past experience would suggest that this is what we should expect. Greater political and fiscal unification would be one response to current circumstances, but the increasingly testy relations between Europe's capitals would seem to make that difficult right now. Two-tier euro anyone'

Photo by Flickr user quaelin, used under a Creative Commons licence.