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Three outlets to save the euro area

Wrote an economic advisor to the French government Jean Pisans Ferry said that the Greek debt crisis deepens concern of the disintegration of the euro area, and noted in his article published by Project Syndicate that there are three indicators to support these concerns.

He opined that the first signs is that European financial institutions that have good financialstatus are preferred - since July last - the deposit of funds in the European Central Bankinstead of lending to commercial banks, a situation similar to what happened in the crisis of 2007-2008.

He stressed that there are good reasons for concern, although banks in the United Statesand Europe, some still lends the other.

The second indicator is the fact that the interest rates charged by banks on the fundsprovided by the borrowers in the countries of Southern Europe is higher than in their counterparts in the north of the continent, which deepens the crisis and complicate crisis economies and increases in the fragmentation of the European market, which is supposed to be uniform.

Rather than fight this trend, the financial supervisory authorities and banking in the north ofEurope promotes this phenomenon by seeking to reduce the exposure of financial institutions to banks in the south of the continent.

The third indicator highlights that international investors are no longer look to government bonds in the countries of southern Europe with the same confidence that they work with government bonds in the north of the continent.
This trend reflects the size of the risk involved in investing in southern European bonds, and represents a fundamental shift in investor mood. If this pattern continues, lending to the countries of southern Europe, the financial solvency of the economies of these countries and their ability to recover will suffer.
He said economic adviser to the euro zone officials, the decision to repair the control of governments, banks and increasing the capital of the European Financial Stability Fund, an important move, but half a step. If the decision was important as the fire caught the crisis, the central issue lies in the need to build a monetary union more stringent and durability.
He pointed out that Alchti growing in the body of the euro area due to the basic "Interdependence" between the banks and governments. Banks under threat of sovereign debt crises, because they have a huge amount of bonds, their governments, governments vulnerable to banking crises because these governments are responsible for saving national financial institutions. Each chapter of the current crisis reflects the dilemma caused by this "interdependence."
Three exitsOn the other hand the article highlighted the three possible outcomes to this situation. The first depends on the interference of the central bank to contain any threat to the sovereign debt market. The budget of the British government from the budget of the worst Spanish counterpart, but the ability of the Bank of England to prevent speculation on the debt of the United Kingdom is enough to reassure investors.
The European Central Bank, which belong to Spain, he had no such authority, and when he tried to do this role with Italy and Spain, was met with strong opposition at home. The European Financial Stability Fund which was established recently could play this role, but the margin of his movement is limited, because the grant of this power would raise opposition to Germany at least for constitutional reasons.

The second exit is to strengthen banks by increasing their capital and the removal of"organizational walls" that isolate the European national banks from each other in order to reduce their exposure to risk bankruptcy under the weight of sovereign debt.

And do this step will support the euro area, but European leaders do not have enough courage to adopted with such a plan in full, and this issue will become clearer when thedetails of the program reveals increased capital of banks.

The third director is to reduce the sovereign risk through the establishment of a monitoring system and mutual guarantees between the countries of the euro area.

This procedure could be tantamount to a consortium, may be authorized to issue "bondseuros." This option is considered a politically very difficult for States and the States fosterguaranteed, but it may be the practice of these exits.

Ferry and concluded that these vents complement each other in part. Even if it did not adopt only one of them, it is still a positive step.

But in the end, remains a challenge for the European continent is the ability to say and do what renews its credibility in the eyes of the market that provides them with loans andfinancial life reasons.

Source: Project Syndicate

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