Finally, the Eurozone needs policies to restart economic growth on its periphery. Without growth, any austerity and reform will deliver only social unrest and the constant threat of a political backlash, without restoring debt sustainability. To revive growth, the ECB needs to stop raising interest rates and reverse course. The Eurozone should also pursue a policy—partially via looser monetary policy—that weakens the value of the euro significantly and restores the periphery's competitiveness. Germany should also delay its austerity plan, as the last thing that the Eurozone needs is a massive fiscal drag.
The Eurozone's current muddle-through approach is an unstable disequilibrium: Kicking the can down the road, and throwing good money after bad, will not work. Either the Eurozone moves toward a different equilibrium—greater economic, fiscal, and political integration, with policies that restore growth and competitiveness, including orderly debt restructurings and a weaker euro—or it will end up with disorderly defaults, banking crises, and eventually a breakup of the monetary union.
The status quo is no longer sustainable. Only a comprehensive strategy can rescue the Eurozone now.
This article comes from Project Syndicate.