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Europe: What's Next, Besides Austerity Lite?
Nov 08, 2012
Publisher: Milken Institute

Much attention has focused on the European Central Bank's efforts to buy time as policymakers labor to design and implement measures that will fully restore the integrity and viability of the monetary union symbolized by the euro. However, their decision-making has not gone smoothly, contributing to a deterioration of economic fundamentals, especially in the periphery of the region. Debt has ballooned to unsustainable levels in the eyes of many economists, particularly those with an emerging markets background.

The German government and Bundesbank have advocated strongly for fiscal tightening as a primary means to overcome the crisis. However, the International Monetary Fund has questioned the soundness of this approach in its most recent World Economic Outlook. The financial press has latched onto this shift in view and is asking what steps countries must undertake next. Given the challenges facing European leaders and their seeming inability to stay ahead of the situation, we expect that more radical measures such as debt reprofiling or comprehensive debt reduction will be needed in the not too distant future.