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Any solution to the Eurozone crisis must meet two objectives. One is short run and the other is long run. Unfortunately they tend to conflict. The first necessary objective is to put Greece, Portugal, and other troubled countries back on a sustainable debt path, defined as a long-term trajectory where the ratio of debt-to-GDP is declining rather than rising. Austerity won’t restore debt sustainability. It has raised debt-to-GDP ratios, not lowered them. A write-down would do it. New bigger bail-outs might too, or might not. But write-downs or bailouts would then create moral hazard and thus make even it even harder to satisfy the second necessary objective. That second objective is to reform the system so as to make it less likely that similar debt crises will recur anew in the future. Fiscal rectitude in the long run is indeed the way to accomplish this. But it is hard to commit today to fiscal rectitude in the future. Rules to cap debt such as the Maastricht fiscal criteria, “no bailout” clause and Stability and Growth Pact (SGP) didn’t work because they were not enforceable.


Frankel, Jeffrey A. "Could Eurobonds Be the Answer to the Eurozone Crisis?", June 27, 2012.