Eurozone crisis spins out of control
By Lee Myong-hwal
Director and senior research fellow at Korea Institute of Finance
The eurozone's fiscal crisis is looking more and more like it is headed toward total collapse. The climb in the bond yields of Italy and Spain is unremitting and fears are growing that the governments of these countries will eventually seek bailout.
After the downgrade of peripheral Portugal and Belgium, it is now core France that faces the risk of an adjustment in its AAA sovereign debt credit rating. The media report said that "the eurozone really has only days to avoid collapse" in arguing that inherent and deepening imbalances within the eurozone will inevitably lead to its collapse.
However, still others contend that while the current crisis is harsh and will take a long period of time to overcome, it will eventually bring the integration of the eurozone on more solid ground.
What will be the path the eurozone will take? To be sure, resolving eurozone's fiscal crisis will require complex and multi-level political agreements and ratification from each of its members.
Even one little myopic political choice could bring devastating effects in the region. It is thus that the leaders in the eurozone must exert all and every effort to avoid a dangerous and perilous result and find a way to save the eurozone from the crisis and collapse.
What are the possible solutions then to current fiscal crisis? France prefers to see the roles of the ECB expanded and the early introduction of a Euro bond. Germany, on the other hand, has argued for strengthening economic reforms and fiscal discipline among members and taking concrete steps towards a fiscal union of eurozone nations.
It has always cautioned that the failure to adopt fiscal discipline would be paramount to inviting moral hazard in the region with open arms. The difference between France and Germany, however, is only a matter of order of priority. If measures to strengthen fiscal discipline are settled, Germany will, in the end, agree to issuing Eurobonds. In the long run, the eurozone will ultimately need to move towards full integration of European fiscal union by adopting a new eurozone tax system like that of the U.S. federal tax under a unified EU Treasury.
The fear in all this, however, is that the process of executing these plans is likely going to take a considerable length of time. In the meanwhile, therefore, expanding the mandate of the ECB will be inevitable. The ECB will either be asked to support the European Financial Stability Facility (EFSF) or to provide a large amount of funds through a third party, and purchase government bonds for the stability of European financial markets. If the government bond holdings of the ECB are transferred to the European Debt Agency, which will be in charge of issuing Eurobonds, the concerns of the ECB over losses and high inflation may be eased.
To sum up, major eurozone countries such as Germany and France must reach a grand political resolution and take drastic measures if they are to end the current crisis. So far, Europe has been taking baby steps at a very late hour and only after the crisis has had gotten worse, due to political concerns. But if the crisis in the eurozone were to deteriorate any further here, it will then bring the eurozone to an endgame and totally devastate the entire region.
Major countries in the eurozone now have two options. First is to utilize their taxes efficiently to take decisive action under the political agreement before the crisis escalates any further. The other is to eke out huge losses and costs wasting more taxes after the collapse of the financial system and the advent of a serious economic depression.
It is often that case that the right answer becomes obvious only when all options are exhausted, but the choice is theirs. The crisis in the eurozone is fast coming to a boiling point. Let's see how Europe makes its move.