The euro zone's unexploded ordnance is no longernuclear
THE euro-zone crisis is not solved and is not likely to be solved soon, butthe greatest immediate danger has been avoided. Two points worth stressing.
1) The euro-zone economy has some "unexploded ordinance" in it that islikely to explode eventually, but no one really knows whether it is a grenade, a1000kg bomb, or a nuclear device; what leaders did last week and are doing thisweek is making sure it is NOT a nuclear device.
Europe still faces a number of vortices that could pull down the euro zoneif allowed to get going: the "Greek" austerity-budget deficit vortex, and the"Lehman vortex" that sucked Dexia below water, as per the diagram below.
However, euro-zone leaders seen to have finally rendered the worst vortexinoperable, namely the "Irish" vortex where by shocks pull down banks, bankspull down governments and then the vortex spreads to the next government inline. In this case it would have been Greek restructuring pulling down banksthat forced nationalisation that forced downgrades that drove up yields whichthen made the governments insolvent. As this might rapidly have reached Italyand Spain, the "nuclear" outcome was truly scary—the sort of thing that hadCharles Wyplosz talking about 1930s-like outcomes.接下来为大家介绍"解答雅思阅读材料：Euro Zones"
The first revelation is that they have now finally admitted thatbackstopping the banks is absolutely essential, mostly via recapitalisation. I’dguess that they’ll flub the job at the EU and G20 summits but that doesn’treally matter. They are now at "battle stations" when it comes to the banks, sowe won’t have a Lehman-like moment that then brings down the world’s thirdlargest debtor (Italy). Either national governments, or the EFSF will make surethe banks remain intact regardless.
The second revelation is that regardless of what they do to scale up theEFSF, it won’t be big enough to backstop sovereigns in a way that will preventcontagion. However, this doesn’t matter as the ECB will be forced to stepin—just as it did in August and for exactly the same reason. Contagion spreadingto Italy, Spain, Belgium, Malta, France etc would spell a very rapid and veryugly end to the euro zone. Besides, they have the ready excuse that theyemployed in August about orderly markets and monetary policy. But not all is forthe best in this best of all possible worlds. The law of unintended consequenceswill be fully enforced.
2) Their half-hearted solution on the banks will almost surely lead to arecession. The most likely outcome is that the bank recapitalisation schemegives Europe’s stronger banks a chance to create a credit crunch instead oftaking government money. This is especially true since German banks areresisting both forcible recapitalisation and further write-down of Greek debts.The euro-zone governments are probably going to insist on the former but not onthe latter. As the figure above shows, the recession is likely to start up allthree of the vortices again, so we’ll be back at the drawing board in a fewmonth’s time. But at least we’ll have avoided a truly historic crisis. Now let’sjust hope the Greek street plays along with the role assigned to them thisweekend. If euro-zone leaders don’t do enough to help the Greeks—to make surethey see a light at the end of the tunnel—we may see political chaos and adisorderly default that would severely test my hypotheses that thenuclear-threat has been removed.