Today, Europe is at a critical juncture that may determine not only whether the euro will survive, but whether the global economy will be once again plunged into turmoil.

The current strategy for dealing with Greece’s debt difficulties is not working. The market has given its verdict: the speculators have been handed an opportunity, and they have seized it. Of this we can be certain: Europe’s response so far has amplified uncertainty concerning the future of the euro. “Contagion” has now spread from the periphery to the centre, to Spain and Italy.
Yet the problem is not so much economic as political. Europe is lucky that in most of the countries in the periphery, there were responsible governments that did not take populist stands. What George Papandreou has done in the past 18 months has been truly impressive – one could hardly have expected more. But in at least one of the countries – and perhaps in the future, in others – there wait in the wings less responsible politicians who would take advantage of widespread, and sometimes justified, views that Europe has not done what it should and has imposed politically unpalatable conditions.
It is easy to see what should be done. If Europe issues European bonds – supported by the collective commitment of all governments – and passes on low interest rates to those in need, debts are manageable. Even if there were some subsidy, Europe could afford it – compared with what will be lost if it does not assist those countries facing trouble.
The other ingredient of a successful response is restoring growth. The current uncertainty has had an especially adverse effect on banks and bank lending. A solidarity fund for stabilisation could, together with the European Investment Bank, make needed investments in the countries in trouble. A revolving loan fund for small businesses could provide money to proven enterprises, to help restart the engines of growth.
Europe’s problems are partly the result of a well-intentioned but imperfectly conceived monetary union. It was hoped that, in spite of the marked differences, if countries only managed their debts, all would work well. Spain and Ireland, which both had surpluses and low debt to GDP ratios before the crisis, showed the fallacy in this logic.
As Europe stands at the precipice, it is time to end brinkmanship and political squabbles. The European Central Bank should realise that a restructuring, even if some American rating agency deems it a “credit event”, means Greek bonds are safer than they were before; if they were acceptable as collateral before, they should be more acceptable after. Put bluntly, to not accept Greek bonds is to end Greece’s membership in the euro, with all the consequences. The ECB must recognise too that for citizens of many countries, a deal without shared sacrifice by the private sector is unacceptable. But those advocating private sector involvement need to realise that the private sector will be reluctant to take a haircut on old loans, and will refuse to accept less than a risk-adjusted interest rate on new.
Resolving this crisis is easily within Europe’s grasp. It is not a matter of economics. It is only a matter of political will.
The writer is a recipient of the 2001 Nobel Memorial Prize in Economics and professor at Columbia University