To prevent Europe's debt crisis from spiraling further out of control, EU nations must act now to create a European treasury with centralized power to issue European-backed bonds and tax at a federal level. Doing so is in the best interests of all member nations – not just those mired in debt.
Since the outbreak of the Greek debt crisis, Europe has tried to fix its problems in a stopgap and short-term manner. Not surprisingly, the crisis has continued to widen, threatening not only the individual economies of Ireland and Portugal and possibly Spain, but the European project itself. It is time to address the crux of the matter with systemic change before it is too late.
As it stands now, Europe’s member states have had no choice but to put themselves at the mercy of the financial markets.
The growing needs of modern states have pushed them to borrow increasingly, using ever more risky and sophisticated instruments. Investors have historically bought this sovereign debt because it has been a relatively safe haven. Unlike corporate debt, public bonds imply a guarantee backed by the state’s tax base.
Yet, just as states create markets which allow them to finance themselves, those markets can turn against the state when the extent of a country’s borrowings leads to doubts about its ability to honor its commitments. As we’ve seen, this can lead to a mortal duel between these two stakeholders, each of which warily watches the other’s moves very carefully as they try to protect their interests.
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