Opinion | Editorials

Growth the only way out of Eurozone debt trap

Hard decisions are necessary to end market volatility and create opportunities for real economy to recover

  • Gulf News
  • Published: 00:00 August 16, 2012
  • Gulf News

The Eurozone is effectively back in recession after it reported that its gross domestic product (GDP) shrank by 0.2 per cent in the three months to June. In the previous quarter, there had been no economic growth in the single currency bloc.

Even Germany, which has been able to shrug off most of the effects of the crisis, so far — and has been underwriting efforts to save the Eurozone — has reported weak growth and worse prospects.

The Eurozone is in a vicious economic and financial downward spiral. Without economic growth, it cannot afford to service its debt. But the financial volatility caused by the debt crisis, is a drag on its economic recovery.

Eurozone countries accumulated an unsustainable amount of debt, in part with reckless spending on social security programmes. Some of this is being tackled with hastily implemented, and increasingly politically unsustainable, austerity programmes. But much more needs to be done to ensure that Eurozone funds are invested in useful economic and human infrastructure development programmes that will lay the basis for future growth, while wasteful spending is quickly eliminated.

Then a final deal must be done on the national debt of each of the Eurozone states. It is not fair or reasonable to expect the debt incurred by individual states to become the collective responsibility of the whole Eurozone. Where necessary, bondholders must take their losses to ensure that governments can service their debts in a fiscally and politically sustainable manner. Countries must drop out of the currency bloc if that is their best chance of building fiscal and economic stability. It is clear that the euro as we know it, cannot survive.

Certainty on the debt crisis, no matter how bad, will do much to reduce volatility on Eurozone and international markets and create opportunities for the real economy to recover. Only then can the Eurozone escape the vicious economic and financial spiral in which it is trapped.

Gulf News
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