During the Tinbergen lecture by Prof.dr. Carmen Reinhart (Harvard University, University of Maryland and PIIE), e.g. co-author of 'This Time is Different: Eight Centuries of Financial Folly' (with Kenneth Rogoff), was addressed the variations on debt themes such as debt overhang, deleveraging, unemployment and double dips in most advanced economies, the European risks from financial crash to debt crisis and more restructurings, the 'capital inflow problem' of the major emerging markets and a global issue of the return of financial repression.

German Council of Economic Experts proposed in the Annual Report 2011/12 a European redemption pact. No definitive solution to the euro area’s problems. But it offers politics a window of opportunity in time that it must use consistently in order to create an overall policy framework for the euro area characterized not only by sound government financing but also by a stable financial system.

Is the eurozone stepping back from the brink? This might just be possible. The eurozone requires a liquidity backstop for its fiscal authority. In a ‘normal’ economy with its own currency, the fiscal authorities can never face a liquidity shortage, because the government can always rely, at least potentially, on support from the central bank. A eurozone government, by contrast, is always in a precarious situation: it has only very long-term assets (its taxing power) and shorter-term liabilities, namely government debt, much of which has to be rolled over annually. If investors refuse to buy the country's debt on any terms, even a fiscally prudent government could find itself in a liquidity squeeze and become insolvent.

Stop contagion through the creation of a quantitative easing programme, coupled with a political agreement among member states on a more federalist budget for the Eurozone.

It's hard to avoid the conclusion that the United States and the European Union are currently engaged in competitive decadence. The two leading polities of the west seem incapable of tackling the debt and deficit burdens which their closely related versions of liberal democratic capitalism have built up. Their politicians dance like drunkards along the cliff's edge of default

Since the onset of the debt crisis in late 2009, the comparisons between Greece and Argentina have multiplied, with an emphasis more on the similarities than the differences. This is not surprising given the stunning parallels. This Commentary draws a systematic comparison between the two countries over the decade before the crisis and the management of the crisis. Overall it suggests that there may be little left to do for
Greece to avoid a repeat of the Argentine default, but in larger scale. A decade of ‘quasi’ monetary union and Monetary Union

The euro was introduced in 2002 as the single currency of the European Union--consolidating the largest trading area in the world and soon rivaling the dollar for global supremacy. But the accumulation of massive and unsustainable deficits and public debt levels in a number of peripheral economies threatened the eurozone's viability by the end of its first decade. The sovereign debt crisis, which fully emerged in 2010, has highlighted the economic interdependence of the EU, while also underscoring the lack of political integration in some areas of the union--along with a weak central government--needed to provide a coordinated and effective fiscal and monetary response to the on-going crisis.

Lack of competitiveness in periphery countries will most likely lead to a break-up of EMU, with the weakest countries exiting EMU. It is only a question of time when Greece will have to default on its debt. The EU is fighting an irrelevant problem: it is not the government debt crisis but the bank crisis and asset bubbles that the EU must tackle. There is no future for the monetary union without deeper political integration.

The European Financial Stability Facility (EFSF) would offer holders of debt of the countries with an EFSF programme (probably Greece, Ireland and Portugal = GIP) an exchange into EFSF paper at the market price prior to their entry into an EFSF-funded programme. The offer would be valid for 90 days. Banks would be forced in the context of the ongoing stress tests to write down even their banking book and thus would have an incentive to accept the offer. Once the EFSF had acquired most of the GIP debt, it would assess debt sustainability country by country.

Adjustment will be particularly difficult for Greece (and Portugal) because these are two relatively closed economies with low savings rates. Both of these countries are facing a solvency problem because they combine high debt levels with low growth and high interest rates. Fiscal and external adjustment is thus required for sustainability, not just to satisfy the Stability Pact. By contrast, Ireland and Spain face more of a liquidity than a solvency problem. Italy seems to have a much better starting position on all accounts.
Fiscal adjustment alone will not be sufficient to ensure sustainability. Without significant reductions in labour costs, these economies will face years of stagnation at best.

The case of Greece has ushered in the second phase of the financial crisis, namely that of sovereign default. Members of the euro area were supposed to be shielded from a financial market meltdown. But, after excess spending during the period of easy credit, several euro area members are now grappling with the implosion of credit-financed construction and consumption booms. Greece is the weakest of the weak links, given its high public debt (around 120% of GDP), compounded by a government budget deficit of almost 13% of GDP, a huge external deficit of 11% of GDP and the loss of credibility from its repeated cheating on budget reports.
Greece – as well as others in the EU, notably Portugal and Spain – must thus undergo painful adjustment in government finances and external competitiveness if their public debt position is to become sustainable again.