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Issue Guide: Eurozone Crisis

Author: Jeanne Park, Deputy Director
Updated: September 3, 2012

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The nearly three-year-old eurozone sovereign debt crisis is entering a critical phase that could determine the fate of the single currency. Despite implementing several rounds of budget cuts, Greece continues to battle unsustainably high debt, and its shrinking economy (BBC) further impedes its ability to adhere to existing bailout terms. With some German ministers now openly rejecting further assistance (Bloomberg) for Athens, speculation about a "Grexit" is once again on the rise. At the same time, rising borrowing costs in Italy and Spain have led to renewed pressure on the European Central Bank to act more forecefully to stem the tide of the crisis. The following materials provide expert analysis and essential background information on some of the core issues at stake in Europe's unfolding debt crisis.

The Challenges of Forging 'Ever Closer Union'

Foreign Affairs: How the Union Came Together and Why It's Falling Apart
Europe risks sliding into irrelevance if its leaders are unable to "generate the solidarity among its citizens" required for true political union and a comprehensive resolution to the crisis, writes Oxford University professor Timothy Garton Ash in Foreign Affairs.

CFR Interview: Fraying European Unity
The paradox of the euro crisis is that it can only be redressed with the kind of political and economic integration that European voters have started to reject in the wake of recent austerity measures and bailout packages, says CFR Senior Fellow Charles A. Kupchan.

CFR Backgrounder: The Eurozone in Crisis
This comprehensive primer maps out the evolution of the monetary union, once the crowning achievement of European integration, and the efforts under way to address its flawed construction and ensure its future survival.

Financial Times: Eurozone: Convergence in Reverse
For all the speculation about a possible "Grexit" and contagion, recent data shows that the growing implementation of asset-liability matching by financial institutions is already undermining decades of European economic integration by shutting out peripheral countries from financial markets.

Foreign Affairs: Why the Euro Will Survive
Peterson Institute for International Economics director C. Fred Bergsten takes a more sanguine view of the euro crisis in Foreign Affairs. For Bergsten, the economic self-interests of member countries will ultimately spur, "stronger institutions and far better economic prospects for the future."

Washington Post: Everything You Needed to Know About the European Debt Crisis
Dylan Matthews summarizes the different circumstances that contributed to each imperiled eurozone country's downward trajectory, debunking the popular misconception that profligate government spending alone was responsible for the crisis.

New York Times Magazine: Can Europe Be Saved?
In 2011, Nobelist and opinion columnist Paul Krugman questioned the efficacy of harsh austerity programs and the feasibility of forging the greater fiscal and political integration necessary for the currency's survival. Since then, his prognosis for the eurozone has taken a decidedly darker turn.

Economist: Acropolis Now
In May 2010, the magazine's editors implored European leaders to take decisive action with a comprehensive Greek bailout to stem the tide of contagion. Two-plus years later, with Greece sunk in an economic depression and a slow-motion capital flight unfolding in peripheral countries, its prescription of stronger political leadership continues to resonate. (Bonus: the now legendary cover.)

Policy Options

Economist: High Gloom
The newspaper's editors caution those looking for European Central Bank President Mario Draghi to deliver a deus ex machina that the nature of the euro crisis is "fundamentally political, not monetary or financial. The ECB cannot fix the euro; it can only buy time."

New York Times Magazine: The Euro Crisis Is Back From Vacation
Planet Money's Adam Davidson maps out seven possible scenarios to watch for this fall, including a potential "Grexit" and unorthodox moves from the ECB. Somewhat ominously, Davidson writes, "There is an end in sight, but boy, is it gruesome."

Die Zeit: Op-Ed: The Future of the Euro: Stability Through Change
In response to the Bundesbank's widely voiced objections to the ECB's bond-buying plans, Mario Draghi writes that, "fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools."

Der Spiegel: Too Close to State Financing via the Money Press
Jens Weidmann, the head of Germany's Bundesbank, discusses his opposition to the ECB's bond buying plan. "We shouldn't underestimate the danger that central bank financing can become addictive like a drug," he says.

INET Blog: The ECB Can Save the Euro, but It Has to Change Its Business Model
The London School of Economics' Paul De Grauwe implores the ECB to buy large quantities of bonds from peripheral countries to keep yields stable.

Financial Times: Op-Ed: A Lifeline Thrown to the Periphery
Former ECB executive board member Lorenzo Bini Smaghi writes that the ECB should adopt a more aggressive stance in shoring up bond markets, and calls upon eurozone members to cede sovereignty to a central European-level authority.

CFR Interview: Weighing an EU Banking Union
Bruegel's Benedicta Marzinotto says EU approval for a proposed banking and fiscal union would help to reassure global financial markets and alleviate the debt crisis.

Project Syndicate: Op-Ed: Clarity About Austerity
For economist Michael Spence, much of the debate over "austerity" has been clouded by semantic confusion about the term's myriad meanings, which has, in turn, thwarted interested parties from "achieving a broad consensus on the right path forward."

Financial Times: Look Beyond Summits for Euro Salvation
Rejecting both unfeasible federalism and unfathomable collapse, FT's Martin Wolf proposes a technocratic response to the crisis that would include direct bank recapitalizations and further liquidity injections from the ECB.

Financial Times: We Isolate and Overload Germany at Our Peril
The FT's Gideon Rachman cautions policymakers against burdening Germany with unreasonable demands, and reminds us that Angela Merkel must balance the larger needs of the monetary union with her own electorate's tolerance for taxpayer-funded bailouts and debt-sharing schemes.

Foreign Affairs: Europe's Optional Catastrophe
CFR Senior Fellow Sebastian Mallaby writes that Germany must moderate its stance on austerity by adopting policies that promote economic growth and provide debt relief for imperiled eurozone countries.

Baseline Scenario: The End of the Euro: A Survivor's Guide
Former IMF chief economist Simon Johnson and co-writer Peter Boone call upon European leaders to commence the orderly dismantling of the eurozone. The duo warns that "a disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008."

Video Offerings

Wall Street Journal: Europe on the Brink
In this half-hour web documentary, Journal editors and reporters explain the origins of Greece's debt crisis, its contagion effects, and the threat that the continent's debt crisis now poses to the global economy.

PBS Frontline: Money, Power, and Wall Street
The last installment of this four-part documentary shows how the banking crisis of 2007-2008 metastasized into a sovereign debt crisis for eurozone members.

CFR Video: Three Things to Know About the Eurozone Crisis
In this CFR Breaking Analysis segment, former Treasury Secretary Robert Rubin cautions European leaders and policymakers from leaning too heavily on monetary policy to solve the crisis. "The ECB, although it can buy some time, is not an answer," he says.

Timeline of Events

BBC: Timeline: The Unfolding Euro Crisis
From the signing of the Maastricht Treaty to this past June's Greek referendum election, BBC's timeline highlights the turning points in European monetary integration and its more recent descent into economic crisis.

Interactive Features

New York Times: It's All Connected: An Overview of the Euro Crisis
This interactive bypasses the often alienating vocabulary of financial crises by illustrating the highly interconnected nature of the global banking system and the domino effect that a member country's default could unleash within the monetary union and global economy.

CFR Crisis Guide: The Global Economy
This multimedia feature examines the root causes and consequences of the global economic crisis by drawing on insights from leading thinkers on economics and international affairs.

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