Prospects for the Eurozone

Speaking on BBC News, Carnegie’s Uri Dadush noted both the importance of the eurozone to the global economy and the acute position its member countries find themselves in, as the euro debt crisis wears on. The eurozone is the largest trading bloc in the world—larger, as a single entity, than the United States. It could potentially withstand the departure of smaller economies, including Ireland, Portugal, and Greece (which financial markets have, to a large extent, written off already). But it would likely not remain intact if the fiscal and financial situation in Italy and Spain, among the five largest economies in the eurozone, deteriorated significantly. Dadush argued that troubled periphery countries in the eurozone have little choice but to muddle through austerity in the short and medium-term, as markets will not lend to them otherwise. The eurozone core, including Germany, and the European Central Bank, however, could do more—for example, accept somewhat higher inflation—to support the periphery’s transition.