At the heart of the euro-zone crisis lie a series of deficits: fiscal deficits, bank capital and liquidity deficits, and productivity deficits.
But the biggest deficit of all is the shortage of political leadership.
But without far greater bravery from Europe’s leaders, the next crisis won’t be long averted.
Prime Minister George Papandreou’s government triggered the latest problems by backsliding on its commitments to the European Union, European Central Bank and International Monetary Fund to embark on major privatizations and structural reforms.
The single currency was always going to depend on member states exercising fiscal discipline and boosting their competitiveness to achieve convergence.
Worse, the architects of the euro launched it knowing it contained a fatal design fault: euro-zone government bonds were zero-weighted for bank capital purposes even though, unlike normal government bonds, they were not backed by a government with the power to issue its own currency and therefore were exposed to credit risk.
A break-up of the euro zone would be a political and financial calamity that would threaten the survival of the European Union. On the other hand, it is still just about possible the euro zone could exit this crisis more united, more powerful, more transparent, more accountable, more competitive, more prosperous.
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