No silver bullet

While there is no silver bullet that will end the current debt crisis, there are things that can be done to help resolve Greece's debt crisis and to ensure that countries like Portugal, Ireland or even Italy don't wind up in just as deep a mess. The approaches may be completely different, but they do have one thing in common: a catch.

Approach No. 1: major cuts

The Greek government is planning to cut spending by 30 billion euros ($42.5 billion) by 2013, and meet the stability criteria set out in the Treaty of Maastricht as of 2014. To do this, the Greek government has lowered public wages and cut jobs, reduced public investment, raised the age of retirement, made it easier to sack employees, privatized public property and increased taxes.

These austerity measures may be tough, but Jörg Krämer, the chief economist at Germany's Commerzbank, isn't convinced that it will be enough.

"Greece is a country in which it usually isn't those who are most competent who get ahead, but those with the best connections in the political establishment," Krämer said. "Breaking this pattern is the important thing. But you can't expect that to happen quickly."

The latest calculations by the European Central bank suggest that even if Greece does implement the savings, it will only be able to get its debt down to 127 percent of gross domestic product by 2020.

Approach No. 2: debt cancelation

Manfred Neumann of the Institute of International Economic Policy at the University of Bonn argues that Greece's creditors should write off 40 percent of its debts – roughly the current value of Greek bonds in the market. He says that such a move would not only ease Greek's budgetary situation, it would also send out a clear signal that there is a risk associated with buying up sovereign debt.

Some politicians believe that cancelling Greek debt could be a way of taking the heat off the other troubled countries. One politician who recently expressed this view was German Finance Minister Wolfgang Schäuble. However, some experts fear this could have the opposite effect.

"This could fuel fears among investors that they would not get their money back from other countries, and that could make the crisis worse in other countries," Krämer said. "It's hard to say what the overall effect would be on the other countries."

Approach No. 3: Greece leaves the eurozone

Should Greece indeed leave the eurozone, it wouldn't be beyond the realm of possibility for other nations like Portugal, Ireland or Italy to follow Athen's lead and withdraw as well. This is not such a bad scenario in the eyes of Manfred Neumann of the University of Bonn.

"This would give us an even more stable euro," Neumann said, pointing out in the same breath that the countries that left could re-enter the eurozone at a later date.

He makes the argument that the euro is actually making it more difficult for Greece to bring down its debt. By leaving the eurozone, Greece could devalue its former national currency, the drachma, which would make the country more competitive, and able to sell more of its products abroad. At the moment, Greece has an unemployment rate of 16 percent. As the drachma would help increase sales, more Greeks would be able to find jobs - and pay taxes.

Jörg Krämer of Commerzbank believes Italy and Greece in particular should never have been allowed to join the eurozone because they simply didn't meet the Maastricht criteria at the time. But he believes that if either were allowed to pull out now, it could make matters much worse.

"Put yourself in the situation of a Greek who reads in the paper or hears on the radio that the drachma is being reintroduced. To avoid losing on the devaluation of the drachma, he'll withdraw his money from the bank," Krämer said. "That means, there will be a run on Greek banks and no banking system in the world could survive that."

Approch No. 4: eurozone countries issue joint bonds

Currently, each country issues its own bonds - and pays the interest rates demanded by the banks. These rates are particularly high for the eurozone countries that are in crisis. Greece, for example, can't issue any more bonds because the interest rates for it are too high. This makes the crisis even worse.

But Christoph Zwermann, a currency expert with Zwermann Financial, believes there is a way out of this dilemma: by the eurozone countries issuing joint bonds. This would create a common bond market, with the interest rates being the same for all of the countries that use the euro.

"The price that Germany would have to pay would be that instead of 3.5 percent on a 10-year term, we would have to pay five percent," Zwermann said.

This would allow the EU to avoid having to come up with repeated bailouts. It would end speculation against single countries. Commerzbank's chief economist, Jörg Krämer believes the creation of eurobonds would actually stabilize the currency union, but there's also a catch here.

"I strongly doubt whether joint bonds would be stable in the very long term. Because the majority of the population don't want to be liable for the debts of the countries on the periphery," Krämer said. "I fear this resistance would grow and threaten the credibility of such bonds."

According to Krämer, in the final analysis, Eurobonds would amount to a desperate attempt to bring the crisis under control. There really is no silver bullet.

Author: Jutta Wasserab / pfd
Editor: Andreas Illmer