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A country such as Greece with large budget and current account deficits cannot stay in the euro unless two conditions are met. First, it needs a political consensus to support many years of painful austerity. But a lot of Greek politicians oppose further cuts. Second, Germany and the “core” members of the eurozone must be willing to sign up to one expensive bail-out after another, indefinitely. That commitment is questionable. The prime minister of one eurozone country told me recently that it would not contribute to any more bail-outs and that Greece should quit the euro.
There are two reasons for pessimism about the eurozone. One is the constant bickering and dilatoriness among Europe‟s leaders. The euro is like a patient on a sickbed, surrounded by doctors who do not agree on the nature of the malady or the medicine required to cure it. Leaders have failed to convince markets that they know what they are doing. The second is the growth of eurosceptic sentiment across the EU. In "peripheral" countries there is increasing opposition to further spending cuts, given the meagre prospects of a return to growth. In core countries such as Finland, Germany and the Netherlands, there is growing hostility to further bail-outs. So even if the doctors find the perfect remedy and agree on the treatment, parliaments in northern and southern Europe may spurn it.
Much of the current mess stems from poor leadership. The Commission has stayed on the sidelines, pushed there by France and Germany. The ECB has retained its integrity and independence but its fixation on avoiding any debt restructuring – for fear of contagion – may make the restructuring more painful when it comes. France has allowed Germany to lead. But as one Berlin official admitted to me last week, much of Germany‟s line on the euro has been driven by domestic politics. “We are learning as we go along and we have not understood markets well”, he said. Such candour is encouraging and suggests that a somewhat smaller eurozone has a future.