Robert M. La Follette School of Public Affairs
Monday, April 16, 2012

Article outlines Europe's financial crisis

Resolution of the financial problems facing the eurozone is likely to be contentious and prolonged, two scholars argue in the spring 2012 La Follette Policy Report.

People should not believe that all is well with the bailout of Greece, write La Follette School economist Menzie Chinn and Jeffry Frieden of Harvard University. "For the eurozone to resolve its crisis requires the political will to undertake painful measures, with serious distributional effects. As long as certain groups seek to avoid those costs, resolution of the crisis will be elusive."

Chinn and Frieden, co-authors of the 2011 book Lost Decades: The Making of America's Debt Crisis and the Long Recovery, review the origins of and ideas behind the project to create the euro project. They summarize possible solutions and ruminate on the likely path forward. The solution, they say, is a net transfer of resources to the problem countries — Greece, Spain and Italy — from multilateral institutions or other eurozone countries. "If the transfers do not occur by way of an orderly debt write-down, they will be effect­ed by outright debt defaults," Chinn and Frieden say. "The resulting social and economic costs will likely be much larger than any coordinated approach."