We ask the question: Just what can the Eurozone do to address the sovereign debt crisis?

Largesse from the ECB and the IMF

With Greece, Ireland, and Portugal currently receiving the largesse of the ECB and the IMF to ensure that they do not default on their sovereign debt, the problems are compounding with both Spain and Italy being forced to accept unsustainably high interest rates to service their current refinancing requirements.

The problem is just not going to go away, as potential investors are fighting shy of re-funding the wayward countries. In the early days of the Eurozone, investors were lulled into a false sense of security, as they imagined that all Eurozone sovereign debt was as sound as German Bunds. Not so now, so where does that leave them.

Are Eurobonds the answer?

Can Eurobonds – sovereign debt underwritten by all 17 members of the Eurozone - be the answer?   By definition, Eurobonds thus denominated, would appeal to many of the struggling countries as they would benefit from the security offered by the perceived strength of countries such as Germany.

The hope would be these Eurobonds would only be issued with strict caveats attached, to ensure that all countries maintained fiscal and budgetary discipline and ensure that the debt was repaid in a timely and orderly way. This may be a smoke and mirrors approach to once again tempt investors back into the market assuming that the strength of the German economy would save the day.

There is a clarion call from global markets and investors for such a solution, however, this proposal is being ferociously opposed to by Germany who, quite rightly, believe that their taxpayers will be bailing out the profligate states to the south and in effect giving them a get-out-of-jail card for their previous lax fiscal and budgetary controls.

If not then what?

So what other solutions are there available to the Eurozone?

Well, the obvious first one is the dismantling of the Euro and for the member states to revert to their legacy currencies.   However, such a scenario would bring about the destruction of many of Europe’s banks, as they would only receive massively devalued currencies in exchange for their existing Euro loans held on the books. It would also see the evaporation of the European dream.

A second solution would be for massive continued austerity programmes across all of the Eurozone.  With current economic activity at very low ebb, this solution would only bring about a double–dip into Eurowide recession. The riots in Greece stand testimony to how such austerity measures would be accepted by the general population across the Eurozone.

Thirdly and finally, fiscal union could be demanded across the zone.  What this would mean in reality is that Germany would be calling the political shots and disenfranchising the governments of the failing sovereign economies. Whilst this fiscal union was the holy grail of the economic union, it simply would not be acceptable by many countries, as they would be ceding their national sovereignty away.

What this equates to is the fact that the governments of the Eurozone are therefore stuck between a rock and a very hard place. Meanwhile, the risk-averse global investors are continuing to desert the debt of Eurozone governments and in turn their banks.

The consequences of any action.

We have a danger of a spiralling cycle of higher and higher borrowing costs for the member nations, leading to more austere spending cuts and slower economic growth. This could be a very difficult scenario to reverse, as many of the banks also struggle to refinance their debts.

The coming few weeks will see this heated debate continue apace as the global investors eye the Eurozone with an ever more sceptical view.

It is important to take professional advice before making any decision relating to your personal finances.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.