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Project Syndicate: The Eurozone’s Calm Before the Storm

Author: Nouriel Roubini
September 30, 2013

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"So far, the grand bargain between the core and the periphery has held up: the periphery continues austerity and reform while the core remains patient and provides financing. But the eurozone's political strains may soon reach a breaking point, with populist anti-austerity parties in the periphery and populist anti-euro and anti-bailout parties in the core possibly gaining the upper hand in next year's European Parliament elections."

A little more than a year ago, in the summer of 2012, the eurozone, faced with growing fears of a Greek exit and unsustainably high borrowing costs for Italy and Spain, appeared to be on the brink of collapse. Today, the risk that the monetary union could disintegrate has diminished significantly – but the factors that fueled it remain largely unaddressed.

Several developments helped to restore calm. European Central Bank President Mario Draghi vowed to do "whatever it takes" to save the euro, and quickly institutionalized that pledge by establishing the ECB's "outright monetary transactions" program to buy distressed eurozone members' sovereign bonds. The European Stability Mechanism (ESM) was created, with €500 billion at its disposal to rescue eurozone banks and their home governments. Some progress has been made on a European banking union. And Germany has come to understand that the eurozone is as much a political project as an economic one.

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