This one of the clearest and most concise explanations we’ve seen of the troubles in Euroland. The potential for the European Central Bank to become a permanent backstop is very real, and it would likely create an entirely new set of challenges down the road. We continue to believe an orderly Greek default is the best option for the market and for Europe, but that outcome is growing less likely as more and more money is thrown at the problem.
One of the benefits of being an academic economist is that market participants and government officials will often tell you what they think in relatively frank terms. Here is what I learned in dozens of meetings last week in Frankfurt, Madrid and London: There is wide agreement that the status quo is unsustainable, and no one is optimistic about the future. The elevated cost of borrowing for banks and some governments must be addressed within weeks or at most a couple of months. The euro area needs more integration and cooperation or it will dissolve. European central bankers say a breakup would cost a lot more than maintaining the union, yet they admit that there are severe — and possibly insurmountable — political impediments to getting Germany to guarantee other countries’ debt….