As long as the eurozone's internal divergence in unit labor costs persists, the euro crisis cannot be fully resolved, because current-account deficits and/or slow growth will continue to stalk the “south,” perpetuating worries about sovereign debt and commercial banks. But the burden of adjustment cannot rest solely on the south.
WASHINGTON, DC – The eurozone crisis unfolded primarily as a sovereign-debt crisis mostly on its southern periphery, with interest rates on sovereign bonds at times reaching 6-7% for Italy and Spain, and even higher for other countries. And, because eurozone banks hold a substantial part of their assets in the form of eurozone sovereign bonds, the sovereign-debt crisis became a potential banking crisis, worsened by banks’ other losses, owing, for example, to the collapse of housing prices in Spain. So a key challenge in resolving the eurozone crisis is to reduce the southern countries’ debt burdens.
WASHINGTON, DC – The eurozone crisis unfolded primarily as a sovereign-debt crisis mostly on its southern periphery, with interest rates on sovereign bonds at times reaching 6-7% for Italy and Spain, and even higher for other countries. And, because eurozone banks hold a substantial part of their assets in the form of eurozone sovereign bonds, the sovereign-debt crisis became a potential banking crisis, worsened by banks’ other losses, owing, for example, to the collapse of housing prices in Spain. So a key challenge in resolving the eurozone crisis is to reduce the southern countries’ debt burdens.