It's time for Europe to take decisive action

It is now clear that the European sovereign debt crisis cannot be resolved by throwing ever more money after bad loans or with increasingly complicated financial engineering. Despite European authorities putting in place a rescue fund worth about €700 billion (Dh3.37 trillion), markets remain unconvinced that they have sufficient resources to rescue those countries which are struggling to service their debt burden.

The markets are right. Italy, Spain, Greece and a number of other European countries are all experiencing difficulties managing their national and corporate debt. While there is little consensus about how much bad debt there is in Europe, it will likely easily overwhelm any rescue fund. Already, the interest on Spanish and Italian debt is unsustainably high.

The threat of a renewed European debt crisis is responsible for the dangerous volatility on international financial markets which is undermining the business and consumer confidence that is essential to a sustainable economic recovery. It is time for the European authorities to take decisive action. Rather than drag out the crippling uncertainty they must identify those countries and institutions that are most at risk and restructure their debt. At present, Spain is a prime candidate for an orderly default that can be managed with the aid of the European authorities. Orderly defaults will clearly show much debt is not recoverable and the risk to key financial institutions. Where necessary, investors must take the pain of bad investment decisions. Financial losses are a reality of the free market. Restructured debt agreements will give those countries and corporations in need the time necessary to better manage their cash flow and repair their balance sheets. While the dangers are great, the reduced financial volatility will make it easier for Europe — and the world — to expand the international economy. And economic growth is the real solution to the debt crisis.