The first act of the eurozone debt drama was about whether any European Union member country could ever become insolvent. It ended when the highest EU authority, the European Council, officially recognised in late July that Greece does need a reduction in its debt obligations. But that acknowledgement of reality does not end the drama. The second act will be about restoring growth prospects for the EU periphery, which will pose an even more difficult challenge.
In order to increase their long-term potential growth, this Commentary argues that governments in the eurozone’s periphery, including Spain and Italy, now face a dilemma: they must undertake structural reforms, but at the cost of even greater short-term pain. The debt crisis will end only when they have shown that they have understood this and accepted the inevitable sacrifices.
Daniel Gros is Director of the Centre for European Policy Studies.