In the early 1990s EU governments had to choose between defending their exchange rates and the health of their economies. Now they have to choose between disappointing the bond markets and imposing austerity on their voters.
“Firefighting: The sovereign-debt crisis has echoes of the ERM debacle“, The Economist, 14 July 2011
Three major uncertainties are rattling the markets:
- the lack of EMU political leadership as regards (i) co-ordination across countries and with the ECB as well as (ii) a reluctance to push through vital restructuring/austerity packages
- weak growth prospects that mean a severely reduced ability to repay debt as well as added stress for the banking sector
- the inadequacy of existing bail-out funds
For a useful overview, see “Europe’s debt crisis: Fudge, the final frontier“, The Economist, 10 Sep 2011.