Balanced solution

DW: For many economists, Greece's pullout from the eurozone is just a question of time. Is the eurozone better off with or without Greece?

If the new Greek government insists on the extreme measures outlined during the election campaign, it is quite probable that Greece will pull out next year. For the euro itself, the question is not as important as it was two or three years ago, because the possibility of Greek withdrawal has already been acknowledged by the financial world in recent years. Aside from that, we have already experienced a debt cut in Greece, so stability in the eurozone could still be maintained after the Greek exit.

During this debt crisis, the financial markets have been behaving like drug addicts, demanding ever-stronger doses at higher frequency. Are European politicians capable of winning this battle?

I think a different analogy would work better. It's not like asking for drugs - rather, it's turning away from Europe. International capital markets have less and less motivation to finance countries, due to the unstable situation. But I think that European economies have the means to bridge the time until confidence is regained. There are mechanisms to continue the financing system, although these do make northern Europeans increasingly more dependent on southern debtors.

It is possible to help Europe through this adjustment phase, so long as the indebted countries remain determined to reduce their debts. This means we'll need to see some real progress in economic adjustment within the next one or two years. If that happens, even a financial problem in Italy could be handled.

Does this mean that the markets have lost all their faith in the euro?

The markets have very little confidence in the euro because it's a currency shared by 17 countries - a previously unknown construct. And everything that's unknown initially evokes mistrust, especially when snags occur in several places, as we're seeing now. But at the same time, we cannot forget that the currency is also a political decision. The special feature of this particular currency is that it aims to foster political integration, but at the same time it needs to satisfy the requirements of the markets. It will probably be hard to achieve both.

I think the euro will continue to exist, though it's not something the markets will accept unconditionally in the long term.

Instead of bumbling on, other options have also been suggested, such as splitting the eurozone or breaking it up completely. What's the most likely scenario?

There are indeed some extreme scenarios. One of them is the division of the currency union, probably into a northern-European hard-currency bloc with satellite currencies in the south. The other is a fiscal union with strong political unity, seen as the "United States of Europe," which would surely satisfy the markets but which would be politically unrealistic for many years.

I think that a happy medium will be found. There could still be a currency union made up of independent countries - an imperfect concept from the capital markets' perspective. There will also be further economic adjustments in the coming years.

In southern Europe, current account deficits will diminish, and with them the internal European imbalances. There are likely to be attempts to improve the euro through better-coordinated financial policies and uniform bank regulations. These are small steps toward a well-functioning currency. At the same time, European governments may be ready to accept an imperfectly functioning currency in order to pursue the goal of political integration.

Interview: Zhang Danhong / ew
Editor: Sonya Diehn