A lack of trust among euro-area members is preventing leaders from implementing a durable solution to the sovereign debt crisis, said Paul De Grauwe, a professor at the London School of Economics.
“The Germans don’t trust the southerners, the southerners don’t trust the Germans,” De Grauwe said in an interview with Tom Keene on Bloomberg Television’s “Bloomberg Surveillance” today. “As long as there is distrust there is also no willingness to allow others to decide about your fate. You can only do that if you trust each other, and that unfortunately is lacking in Europe.”
Euro-area finance ministers meet today in Brussels after leaders agreed at a June 28-29 summit to ease the way to direct recapitalization of banks from bailout funds and to start work on Europe-wide bank supervision. Former U.S. Federal Reserve Chairman Paul Volcker today urged Europe’s leaders to forge closer economic union by overcoming nationalistic concerns.
De Grauwe said the European Central Bank is partly to blame as it has “waited so long” to intervene that “a lot of damage has been done.”
“The problem is indeed that sovereign governments in the euro zone don’t rely or cannot rely on the printing press like the U.S. government can, so as a result they can really run out of cash,” he said. They end up “pushed into a liquidity crisis that can degenerate into a solvency crisis and somebody must stop that, otherwise these countries go down the drain.”
The Frankfurt-based ECB last week cut its main interest rates by 25 basis points, taking the benchmark to a new record low of 0.75 percent and the deposit rate to zero. President Mario Draghi said the cuts may have only a “muted” economic impact.
“It’s going to be difficult,” said De Grauwe. “Of course it’s only the ECB that can do it. The European Stability Mechanism doesn’t have the resources to do so.”
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