Debt hangs over recovery for EU strugglers
Prescription of tough medicine to aid economic reforms runs up against political backlash fears
As the euro zone's weakest members crawl out of their longest recession in modern history, their prospects of recovery are weighed down by a crushing mountain of debt far heavier than before four years of financial crisis.
Italy, Greece, Ireland and Portugal all have public debt well in excess of annual economic output and risk a Japanese-style "lost decade" of grindingly low growth and high unemployment as they slowly repay their way out of trouble.
The average ratio of debt to gross domestic product in the 17-nation bloc stands at 95 per cent - lower than in the United States and far less than Japan, but dangerously high for ageing societies that cannot individually print money or devalue.
The official European Union line is that each bailed-out country must clean up its own mess and grow its way back to health without debt relief or mutualisation, except perhaps for Greece, which has long been declared a special case.
"As Margaret Thatcher used to say: TINA - There is no alternative," said Graham Bishop, an economic consultant.
Fiscal discipline and pro-market reforms to liberalise labour contracts, break trade union wage bargaining power, and curb welfare and pensions, were the only road to salvation, Bishop said.
Yet other economists, and a closet minority of EU officials unwilling to break ranks publicly with the orthodox line, say that policy prescription is politically and socially untenable and Europe will have to consider some form of broader debt relief, perhaps through the European Central Bank.
"Ideally the euro zone would combine a symmetrical budget policy with debt monetisation by the ECB," economist Paul De Grauwe at the London School of Economics wrote in an essay for the Centre for European Reform.
Under such a policy, low-deficit countries like Germany with room for manoeuvre would run a more expansionary budget to balance out spending curbs in peripheral states, while the central bank would buy up and retire weaker states' bonds.
Neither option is likely, given Germany's fear of inflation and the vehement resistance across northern Europe to any perceived sharing of the burden of other euro countries' debts.
De Grauwe said the alternative was that countries like Greece and Portugal would default sooner or later, since politicians in those countries would not accept being forced to transfer resources for years to rich northern creditors.
Yet default remains taboo in the euro area even after Greece's imposition of losses on private bondholders last year.
Two other economists who analysed the options in a paper on the economic website VoxEU in August concluded that the only realistic and effective option would be for such countries to default by selling monetised debt to the ECB.
Arguing that Europe's debt crisis was still getting worse despite appearances to the contrary, Charles Wyplosz, a professor of international economics at the Graduate Institute in Geneva, and Pierre Paris, the chief executive of Banque Paris Bertrand Sturdza, said this would amount to "burying the debt forever".
Under their scheme, the ECB would buy up €1.2 trillion (HK$9.3 trillion) in bonds of the most indebted countries and exchange them for a perpetual interest-free loan that would never be repaid unless the bank was liquidated, effectively eliminating the debt.
Such moves have sometimes caused runaway inflation, but the authors argue it would be unlikely to do so now because credit markets are so weak that increases in the monetary base do not expand money in circulation.