The time has come to make some tough calls.
So here we go again. Once more stock markets around the world are tumbling. Key indicators of credit stress are reaching danger levels. Banking shares, especially French banking shares, are being smashed.
But now the attacks are coming from multiple angles. On the one side, Italian bond yields are rising back up to the danger level of 6%. On the other side, evidence is mounting that the global economic recovery is at a standstill. And Greece is in dire, dire trouble.
In the danger zone
The IMF has not minced its words: it has warned that the global financial system is more vulnerable now than at any time since the 2008 financial crisis.
It said that some European banks are particularly weak and "urgently need to bolster their capital levels". Time is "running out to tackle vulnerabilities" that threaten the banking system and economic recovery.
David Cameron has also weighed in. He said that the global economy is close to "staring down the barrel" and is threatened by the failure of eurozone leaders to agree a lasting settlement to stabilise the single currency.
"The problems in the eurozone are now so big that they have begun to threaten the stability of the world economy," Cameron said. "Eurozone countries must act swiftly to resolve the crisis."
It's time for action
The picture is clear. The can has been kicked down the road enough times. The time has come for real, decisive action.
But what should be done? I suspect the reason swift action has not been taken yet is because the options are, quite frankly, frightening. But sometimes it is better to face your fear than to keep running away from it. It is better to deal with a problem immediately rather than letting it fester.
For these reasons my view is that Greece should default, and default now. And it should default big -- I would suggest a 50% haircut. This would take Greece's debt down to around 80% of GDP, which is the same as the proportion in France and Germany. That would be a level of debt which is, one would hope, manageable for the Greek economy.
But not only should Greece default; it should also leave the euro. Why? Well, because one of the main reasons Greece is in such a bad way at the moment is its membership of the euro.
Greece is currently a member of a currency union where the currency is incredibly strong because of the economic power of nations such as Germany and France. But the strength of the euro means that the Greek economy has become deeply uncompetitive. So, whilst Germany has been booming, Greece is in depression.
Can Greece 'do an Argentina'?
As I described in a previous article, Argentina was in a similar situation when it pegged the peso to the dollar in the 1990s. The economy was incredibly uncompetitive and so tipped into recession. But then Argentina both defaulted on its debts and devalued its currency.
Initially, all hell broke loose. The economy contracted, unemployment shot up, inflation rocketed -- it seemed like Armageddon. But a couple of years later the economy righted itself, was once more competitive and was no longer over-burdened with debt. Ever since then Argentina has been booming.
One academic who studied the Argentina crisis in great detail was a certain Nouriel Roubini. He is recommending exactly what I suggest.
However, it is not quite as easy it seems. Firstly Greece's debts are substantially bigger than Argentina's were at the time of its default. The worry is that, whereas banks could cope with the Argentinian default, they would find it harder to take the hit of a Greek default.
Plus there is the danger of contagion spreading through the eurozone, with a run on sovereign debt in countries such as Portugal, Ireland and Italy.
But, at this stage, I think the choice we have is not between a default and no default. It is between an orderly, managed default and a disorderly, chaotic default. I know what I would choose.
Save the euro, save the world
But it doesn't stop there. Eurozone leaders need to undertake a complete package of measures. They need to substantially expand the European Financial Stability Facility so that it is able, if necessary, to recapitalise any banks that get into trouble.
For those countries that remain in the euro they need to bind these countries more tightly together in a fiscal union. They should work towards Eurobonds. And the European Central Bank must cut interest rates and introduce quantitative easing to stop the European economy from stalling.
I will not pretend that any of these things is easy. They are in fact very difficult. Indeed, they require a unity of purpose and a sense of urgency which Europe's leaders have so far failed to muster. But, make no mistake, Europe needs to act now to save the euro, and to save the world. Time is running out.
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