Escaping Europe's Catch 22

Fabian Zuleeg, Janis A. Emmanouilidis

EPC Commentary

01/2012

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In early 2012 the situation looks better than it has for a while, but the crisis recovery still remains very fragile. In this EPC Commentary, Fabian Zuleeg and Janis A. Emmanouilidis argue that the euro zone is caught in a Catch 22, as multiple parallel crises often require contradictory responses. National reform efforts and fiscal prudence are indispensable but they do not produce a decisive break from the downward spiral.

In order to get ahead of the curve the authors argue that two key additional elements are required to change the tide: (1) a 'New Deal' based on investment rather than transfers to help kick-start growth, especially in the weakest economies; and (2) a temporary and partial collateralisation of debt, sending a strong signal to investors that euro countries are ready and willing to integrate further, which would boost confidence in the future of the common currency.

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