Europe Is Sleepwalking Towards Imminent Disaster, Warn Top Economists

Ambrose Evans-Pritchard

Europe is “sleepwalking towards disaster,” according to17 experts, who warned that over the past few weeks “the situation in the debtor countries has deteriorated dramatically.”

“The sense of a never ending crisis, with one domino falling after another, must be reversed. The last domino, Spain, is days away from a liquidity crisis,” said the economists. They include two members of Germany’s Council of Economic Experts and leading euro specialists at the London of School of Economics, all euro supporters.

The warning came as contagion from Spain pushed Italy’s borrowing costs to danger levels. The crisis is starting to ricochet back into Germany, and doubts are emerging about the creditworthiness of the German state itself.

Moody’s warned that Germany faced the “risk of a shock” from a Greek euro exit and the likely knock-on effects through Spain and Italy, as well the “German banks’ sizeable exposure to most stressed euro area countries.”
The 17 economists said the system could be stabilized immediately by creating a lender of last resort to backstop the bond markets, either by mobilizing the ECB or by giving the Eurozone bailout fund a banking license to borrow from the ECB.

The deeper problem can then be managed through a European Redemption Fund that takes over a chunk of the “legacy debt” left by the errors of early EMU.

In a veiled rebuke to hardline politicians in Germany, the economists said the root cause of the crisis has been the boom-bust effect of rampant capital flows over the past decade, not delinquent behaviour by feckless nations. The current course, they said, had become hopeless. 

The lack of any light at the end of the tunnel is leading to a populist backlash in both the debtor and creditor states. The only question is whether the North or the South succumb to revulsion first.

source: The Telegraph