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“If a reconstruction plan does not come soon, Europe’s leaders will be charged with ‘the decline of the West'”. Sobering words from Gordon Brown, former Prime Minister of the United Kingdom published in an op-ed in the International Tribune this week.As worries over Greece continue to grip the market, the instability of Italy and Spain’s sovereign debt has become a major concern as well. (See: EU Officials All Talk, No Solutions, Open Europe’s Ruparel Says)
“It’s now necessary for those trying to manage the sovereign crisis to give certainty, to define with clarity the political objectives, the scope of the instruments and the amount of resources available,” incoming ECB President Mario Draghi said Wednesday in a speech in Rome, Bloomberg reports. “It’s a necessary step to ensure the stability of the euro area and its currency.”
At times like this, the debate almost always shifts to whether the European Union can sustain itself over the long-term.
The Daily Ticker’s Aaron Task sat down with Raoul Ruparel, economic analyst at Open Europe, an independent UK-based think tank, to get his take on the matter.
“If problems fully spread to Italy and Spain, there is no doubt that they are too big to bail out under the current system,” says Ruparel. “And if that happens, it looks as if the [Eurozone] would be forced to break up or move completely towards a complete fiscal union.”
He gives the European Monetary Union five years time to know whether or not it can sustain itself. Right now the current political climate in all European countries is that a break up is not “politically possible,” says Ruparel. But that could all change if it got to the “crunch stage” where a “black or white” decision had to be made between accepting fiscal union – effectively meaning a loss of sovereignty and German dominance of the Eurozone — or abandoning the idea of European unity altogether.
You might be wondering about the so-called “ring-fence” that EU and IMF officials had been trying to erect around Greece to prevent such a contagion. It is Ruparel’s view that EU officials got that strategy all wrong.
“They tried to ring-fence it with a bailout and some liquidity when it is a solvency and competitiveness problem…. If you really want to ring-fence these countries you really need to give them some form of debt restructuring or debt relief,” he says. “It has taken time for financial markets to wake up to this, but [now] have realised that nothing has changed and that Greece is just as insolvent as ever.”