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Ezrati’s Economic Outlook: More Muddle in Europe

If Germany doesn't agree to eurozone bonds, there are other possible compromises.

By Milton Ezrati | Updated on June 05, 2012

As the Europeans meet and speak and summit, it becomes ever clearer just how intense and complex matters have become. Later in June, Greece will determine whether it will stay in the eurozone or perhaps even exit the European Union. In or out, Europe and Greece will have to cope with the aftermath of the decision. Even as Greek questions remain open, a broader drama has grown around recent proposals for the union to issue eurozone bonds that would draw on the generalized credit of all members in common. Though Berlin will likely block such efforts, the negotiations could put Germany in such an uncomfortable position that it will offer other forms of compromise, perhaps by softening its position on austerity or by contributing more generously to the European Stability Mechanism.

The Greeks will effectively decide on membership in a June 17 vote and then, no doubt, in subsequent parliamentary maneuvering. On the chance that the nation does decide to leave, European officials are already working on arrangements that will permit Greece to step out of the common currency but remain in the EU. The decision will almost surely be a Greek one. The rest of Europe does not want to throw Greece out, however troublesome it has become. They know that Athens, whether outside the eurozone or in it, will still owe the money in euros and still have trouble paying. But with Greece outside the union, the Germans and others would lose control. Since they cannot avoid dealing with a failing borrower, they surely would prefer a situation in which they have some control. 

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