Suddenly, all anyone could talk about was Italy’s 10-year bond yields (about 7
per cent, since you ask).
That reflects a rather complacent bit of received wisdom – that such high
borrowing costs are not sustainable, that Italy will soon be unable to
afford them and will have to default on its €1.9tn of sovereign debt, and
that this is the event that will destroy the eurozone.
It is true that if Italy fails, the eurozone fails. The biggest threat Rome
faces, in fact, is not that its debt becomes unaffordable but that investors
stop buying it at any price.
Greek mess
Yet the corollary – that if Italy is saved the eurozone is saved – is not
true. The bloc’s structural flaws will remain. In particular, the virus that
the eurozone has incubated from birth – Greece – will still be in its
bloodstream.
The eurozone will not be saved until it finally sorts out the Greek mess. The
only way to do that is for Greece to leave.
The eurozone’s financial crisis has endured because policymakers have refused
to acknowledge this. That stance began to shift in 2011 during the events
that led to the collapse of George Papandreou’s government.
Exit
Yet it remains the most important unaddressed question now facing eurozone
policymakers, who should consider a Greek exit as a policy option rather
than a taboo. Every attempt to bail out Greece is failing, and each exercise
only increases the debt burden while shrinking the economy and its ability
to repay.
An exit would be horrendous for Greece: a run on banks, overnight
bankruptcies, extreme social dislocation.
The Greek economy, however, is barely 2 per cent of the eurozone’s. An orderly
exit should be manageable and would alleviate the worst effects for Greeks.
Inside the eurozone, Greece has proved the opposite of manageable: its plight
is intractable, its problems have paralysed decision-making and it has
become a distraction from larger questions. In 2012, the eurozone must
ignore the trees and take care of the wood.
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