Contain the crisis

Athens Greece - June 30 2011: A Greek woman holds a flag in front of the Greek parliament during a protest in Athens Greece.

Article Highlights

  • The longer the Euro crisis drags on, the greater the risk of a collapse that would spill over on the US

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  • Europe's single-currency regime has meant that Greece has borrowed more than it can repay

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  • Recognize that Greece is insolvent, write down its debt, and contain the Euro crisis

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This post is part of an ongoing series preparing for the AEI/CNN/Heritage National Security & Foreign Policy GOP presidential debate on November 22nd.

Europe’s financial crisis has raised uncertainty in financial markets globally. The result has been to slow growth even in Germany, Europe’s strongest economy. The longer the financial crisis in Europe drags on, the greater the risk of a European economic collapse with substantial additional negative spillover effects on the United States and the rest of the global economy.

The financial crisis in Europe has resulted from the attempt to impose a single money on such disparate economies as Germany and Greece. Europe’s single currency regime has meant that Greece—along with some other European countries—has borrowed more than it can repay. With European banks and even the European central banks holding large amounts of risky sovereign debt, financial sector risks have risen to a point where they are harming economic growth.

So far the approach to Europe’s debt crisis has been to have richer countries—essentially Germany—lend more to Greece so it can continue to service its debt. However, the condition for such aid has been sharp fiscal retrenchment in Greece, which has caused the economy to collapse and created the riots being seen in news media. Better to recognize that Greece is insolvent, write down its debt, and contain the crisis there than to keep supplying Greece with the funds to service an ever-increasing level of debt. While not a pleasant outcome, such decisive steps could help to keep Greece’s debt crisis from spreading even further—to Portugal, Spain, and Italy—and thereby threatening to precipitate a European economic collapse.

John H. Makin is a resident scholar at AEI

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