We believe that the euro-zone crisis would have been less serious without three huge economic policy errors, by governments, the European authorities and the ECB:
from 2002 to 2007, the lack of responsible macro-prudential supervision (of fiscal policies, private-sector indebtedness, real estate prices, the guidelines of monetary policy, etc.);
in 2008-2009, over-expansionary fiscal policies because governments did not understand that there was not a cyclical recession but a trend break in growth due to the halt in stimulation of demand by increased indebtedness;
Since 2010, a continual and erratic confusion between countries faced with a solvency crisis and countries faced with a liquidity crisis and between the economic policy treatments appropriate for these two forms of crisis.
This confusion persists in 2012, because there is almost no instrument to bail out countries faced with a solvency crisis.
Eoin Treacy's view A bearish or at minimum cautious attitude towards the Eurozone's crisis is perhaps to be expected from a bank right at the centre of the troubled European financial sector. Nevertheless, the exposition of the problems facing the Eurozone is accurate. However, I would question the assertion that the response to the problems is still uncoordinated. The ECB under Mario Draghi has taken a number of steps aimed at improving investor sentiment towards the response to the crisis.
Cutting short-term interest rates twice since November, making €450 billion available to the banking sector last month, continuing to buy large quantities of Irish, Portuguese, Spanish and Italian bonds and gaining agreement from the Fed to make unlimited Dollar swaps available have all contributed to a more sanguine attitude among investors. The IMF's recent announcement that it aims to increase its bailout capacity by $500 billion as well as another round of loans to the financial sector also represent welcome news.
Just how well Greece's negotiations with its creditors evolve remains an uncertainty. However, the ECB is actively pursuing a recapitalisation of the Eurozone's banking sector. This is a necessary step on the road to recovery. Strategies to support growth are likely to return to centre stages before long.
Debt servicing and the austerity required to achieve it is crimping the ability of various peripheral countries to support growth. They need to find some way to reduce their debt burdens through forgiveness or significantly lower interest rates to have any hope of growing their way out of trouble. Negotiations centring on the draft EU treaty on future fiscal discipline will need to address this issue if it is to have any hope of rekindling growth.