Europe's debt situation is likely to continue to worsen, not because of irrational speculation but because governments, businesses, and households all have strong incentives to act in ways that reinforce the crisis.
Managing the tension between domestic politics and the demands of a global economy is one of the major challenges facing politicians around the world.
By openly acknowledging that Greece could abandon the euro, Europe’s leaders may have set in motion events that will automatically force Greece to leave.
Five misconceptions—all rooted in denial—are preventing policymakers from appreciating the gravity of the crisis in Europe, which represents the greatest threat to the global economy since the Lehman debacle.
To save the euro, Europe must not only put out the immediate fire, but also act to prevent future fires by layering both fiscal and political unions on top of its currency union.
Having benefited from the euro at the expense of nations such as Greece, Spain, and Portugal, Germany now has the opportunity to take responsibility for the survival of the Eurozone by sacrificing its current account surplus and allowing debt-laden countries to resume growth.
European leaders should be more willing to learn from the successes and failures of Latin America, a region that knows a great deal about economic crises, bank failures, excessive debt, and the empty promises of populism.
Although Cannes provided the United States and the broader G20 with an opportunity to rescue Europe from its current economic turmoil, the G20 did not make the tough decisions necessary to end the Eurozone crisis.
The European leaders’ emergency summit featured plenty of headline-grabbing numbers, but far fewer actual commitments and details. It will not save the eurozone, but it will allow it live on to fight the next battle.
An economic crisis comparable in size and virulence to the Lehman Brothers episode could erupt if Italy and Spain lose their ability to borrow. The G20 must act now to stabilize the eurozone.