Henry Farrell and John Quiggin in Daily Beast:
Europe is on the brink of disaster—again. The possibility of a Greek default sent the markets roiling on Tuesday. And despite more than $2 trillion doled out to troubled nations such as Greece and Portugal, Europe’s leaders are once again meeting behind closed doors, trying to find a way to stanch the bleeding.
It won’t work, and the window of opportunity is closing fast. At their core, Europe’s problems are political, not economic. And until the continent’s richer nations find the political will to help their poorer counterparts, the situation will remain dire.
If this was just an economic problem, the solution would simple. In the short-term, Europe needs to shore up investor confidence, and the European Central Bank could do that by announcing that its top priority is preserving the euro, not price stability. This would allow the ECB to increase the money supply and ease the strain on struggling economies such as Greece and Portugal. In the meantime, the wealthier nations could put together a once-off restructuring of, say, Greek debt, and a recapitalization of the country’s national banks.
These two steps would dilute or even wipe out shareholder equity in many banks, and impose heavy losses on debtors. Those losses are unfortunate, but they are essential to recovery. The reality is that all lenders bore some responsibility for creating the economic bubble and all must pay their fair share to resolve the crisis.
The problem: Figuring out the politics.