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 are the only road to salvation, he argued.
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 via the European Central Bank. "Ideally the eurozone would combine a symmetrical budget policy with debt monetisation by the ECB", Belgian 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 in 2012. Eurozone policymakers say "financial repression" is the least politically difficult option to ease debt while trying to spur growth and productivity through economic reforms. "I'd personally be in favour of financial repression, but there are spoken and unspoken ways of dealing with it. The ECB will play a key role", said a senior eurozone policymaker, who declined to be identified because of the market sensitivity of such issues.
Economist Bishop said the impact would effectively be to make savers and retirees pay over time for debt reduction by denying them any real return on government bonds held by their pension funds and savings instruments. "Since bondholders have historically got a 2 per cent real return on government bonds and are getting virtually none now, that's equivalent to giving them a 2 per cent haircut a year, and it will go on for a long time", he said. "Over a decade, that amounts to a 20 per cent cut in the debt."
But the windfall is unevenly shared. Safe haven countries such as Germany and France will reap more benefit than states whose debt is perceived as riskier, such as Portugal or Italy.
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