Euro-zone leaders continue to debate how best to reinvigorate economic growth, with French and Italian leaders now arguing that the euro zone’s rigid “fiscal compact” should be loosened. Meanwhile, the leaders of northern member countries continue to push for more serious structural reform.
Ideally, both sides will get their way, but it is difficult to see an endgame that does not involve significant debt restructuring or rescheduling. The inability of Europe’s politicians to contemplate this scenario is placing a huge burden on the European Central Bank (ECB).
Although there are many explanations for the euro zone’s lagging recovery, it is clear that the overhang of both public and private debt looms large. The gross debts of households and financial institutions are higher today as a share of national income than they were before the financial crisis.
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