{mosads}
The eurozone economy is stalling. Peripheral nations are beginning to fall under the tremendous weight of their sovereign debt and political dysfunction and inaction increases the risk of sovereign debt defaults, a banking crisis and a global recession. The first domino is Greece.
At only two percent of the eurozone’s GDP, Greece could have been helped. The eurozone could have gone big and allowed for a large debt haircut and a simultaneous cash infusion into banks to ensure their proper capitalization.
But instead Europe focused on forcing Greek austerity, which lead to economic decline, riots and kicking the proverbial can down the road.
Now, with the Greek domino teetering on its edge, the second domino – Italy – may fall. With 120 percent debt to GDP, Italy is over-levered. Add political dysfunction and investors fleeing for the exits to the mix and Italy seems destined for its own Greek tragedy.
Italian bond yields rose to over seven percent, which, if they remain at those levels or go higher, will be devastating. To save the Italian domino from falling, the ECB needs to buy Italian bonds, which will artificially reduce rates, and investors need to regain confidence.
But can this occur? Does Europe have the economic fire power and political will? If past is prologue, it doesn’t look good. To fix the situation, the strong eurozone nations (or, Germany, perhaps the last strong eurozone nation) and the ECB need to go all the way. They need to put all of the economic firepower they have into fixing the debt crisis.
If they do not, with the economic malaise, unsustainable European entitlement system and impossibly complex and incomplete political union, it is easy to see the dominos start to fall.
Jonathan S. Henes is a restructuring partner with Kirkland & Ellis LLP