Friday, September 16, 2011

Why Europe has only a month to solve debt crisis

If Europe's leaders do not restructure the euro and European debt within a month, the markets will force it on them.

The highly publicised three-way phone conversation between German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou may have calmed the markets but it provides no solution for Europe's economic and banking woes. If anything, by delaying decisions, it makes the crisis worse.

As economic forecasters, we have the advantage of being able to use our models of the European economies to help evaluate the likely outcomes of different policies.

These models start from the knowledge that growth in the Western economies is likely to be fairly sluggish at best in the medium term. Against this background, the only countries that are able to get away with cutting deficits rapidly through deflationary policies are those with underlying export strength, like Ireland, or with the ability to devalue their way out of trouble like the UK. more