It is not certain that the full repayment of all currently contracted sovereign debts, sustainable growth for all, and the euro zone retaining all of its members will prove feasible. The private sector is making clear that it recognizes this painful reality. Official-sector planning needs to recognize it as well. Outside Europe, even as leaders hope for the best they need to plan for the worst, ensuring adequate liquidity and demand in their economies even if Europe’s situation deteriorates rapidly. The fortification of the International Monetary Fund is a start; policymakers also need to consider national strategies, trade finance and social safety nets.
A euro-zone collapse would be an economic disaster that might define our era. That prospect must focus the minds of all at the G-20 on immediate action. Those outside Europe must persuade Europeans that the rules change when the stakes rise. The European Central Bank’s credibility will mean little if there is no longer a common currency.
Setting the right precedent seemed much more important 24 hours before Lehman Brothers’ collapse than 24 hours afterward. Now is the time for radical cuts in the rates official creditors charge European sovereigns; for a willingness to subordinate official debts, not to privilege private creditors but to offer a prospect for systemic preservation; and for expansionary monetary policies in Europe that prevent deflation and encourage the growth that can create jobs and reduce debt. Only if the system is preserved can its future be debated.