Last week’s widening in sovereign bond spreads and the results of stress tests on Irish banks have reminded us that the eurozone has made hardly any progress in actual crisis resolution – in spite of its pretentious grand bargain. Over the next few weeks, I will try to map out various scenarios of how the crisis might evolve. It is probably the toughest challenge the European Union has confronted in its history. The eventual outcome will depend on a complex interaction of politics, finance and economics.
In this column, I focus on the politics of crisis resolution, beyond the well-known fact that there is opposition in countries such as Germany and Finland to large-scale bail-out regimes. This opposition is serious, but such countries also face political constraints that pull them in the opposite direction. One of those is a keen interest in avoiding a messy default. As a result, they are torn between two conflicting positions: avoiding default and avoiding bail-out.
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