IN DECEMBER, The Economist warned that without dramatic intervention the euro zone could face a new depression. Soon after, the European Central Bank sprang into action, averting an immediate financial meltdown through heavy lending to banks. The resulting calm looked like an opportunity for euro-area leaders to seize the moment and escape, once and for all, from crisis. Instead, complacency set in. The ECB's financial anaesthetic has not prevented a steady economic deterioration that now threatens to engulf—and perhaps end—the euro zone.
Across the euro area, unemployment is worsening. The unemployment rate touched a new record high in March: 10.9%, up a full percentage point from the prior year.
Of course, the pain is not evenly distributed. It is low and reasonably steady in the north but high and climbing in the south. Youth unemployment rates are staggering—over 50% in Greece and Spain, 36% in Portugal and Italy, rising sharply in all four.
There is worse to come. Manufacturing activity is slowing sharply across the euro area, and the core is no longer immune:
The details of these reports are most worrying. April's decline was stunning, but new order inflows tumbled at the fastest pace since December. The job decline in manufacturing is now impacting Germany and France.
The picture is distressing. It is not surprising. The euro-zone economy is large and overwhelmingly driven by domestic demand. That demand has been steadily squeezed by a broad, sustained fiscal tightening. Monetary policy is providing almost no relief. The ECB raised rates last year, and while it has since unwound the 50-basis-point increase from 2011, it shows no interest in cutting rates further below the present 1% level. Quantitative easing looks out of the question. The ECB's extraordinary lending to banks seems to have stabilised bank-financing conditions; it does not appear to have prevented a sharp slowdown in lending to the private sector. There was no way to avoid a return to recession amid such circumstances.
Ordinarily, of course, policymakers would react to this deterioration by taking steps to stabilise the economy. What is most frightening about the euro-area picture is that this is not happening. For now, austerity remains the rule. Despite the nastiness of the economic picture, the ECB is widely expected to take no action at its meeting tomorrow. The euro area is walking, eyes wide open, into depression. Led by its periphery, which is already there.
Most everyone seems to have convinced themselves that this sort of thing isn't so bad, so long as a Lehman-like financial collapse is avoided. It isn't. Nothing good will come of a euro-zone depression.
If, when all of this is said and done, the euro zone descends into a chaotic, costly break-up, many people will write that such a thing was inevitable, unavoidable. They'll be wrong. We are watching causation this very moment: institutions that know how and why to prevent things from falling apart and which nonetheless sit back and do nothing.
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If the eurozone breaks up, normal service will be resumed and a depression will be avoided.
A great piece!
Europe is "sitting back and doing nothing" because doing something means Germany agreeing to a transfer union. This they will never do, so the Euro will fall apart as a result. It really is as simple as that.
Wait election in France
Wait for disaster with Mr Hollande.
A one trillion Euro ECB monetary easing would create "Half Of One Percent of Inflation" if it was divided into equal portions and given to every taxpayer of record in the Euro Zone tax free. This would help to reenergize the economy. Most of these Euros will be spent several times a month the first year. The "Irrational Fear of Inflation," combined with the "Irrational Comfort of Economic Decline" Inflation is a form of investment cost, to purchase an economic outcome. No Inflation/No Outcome
The LTRO was used to support banks not the real economy so it not going to help with growth. Yes inflation remains low as Europe is almost dead.
True, I think the Euro Zone can still work, but only if member Nations and the ECB rethink what monetary easing can be when applied at the lowest levels of their economies. The top down approach won't fix the mess their in.
It still all boils down to Germany agreeing to a permanent and massive Transfer Union being established. This was specifically excluded when the Euro was put in place otherwise the Euro would never have been born.
I personally think that there is next to no chance of Europe finding an acceptable soution - I am not even sure that a real solution exists. The Euro is basically so flawed in its design that I fear a disaster coming up.
Yes, I would agree with you. Unless there are fundamental changes to the current system making it relevant to all levels of the economy it is over. If uncorrected, I believe starting around March 2013 it all really starts to go over the cliff. Sadly it will be too late to fix without very longterm pain; worse than the level of pain Argentina went through a decade ago. The problems in the Eurozone are too complex and will be long lasting as their unwound. Lots of monetary easing with all its inflation is the cheep fix, but you right, they won't/can't do it.
This is still the Economist, right? It seems like I'm reading a different magazine sometimes. No discussion of unwinding trade imbalances (particularly Germany's with the southern portion of the EZ). No discussion of the practical limitations of the EZ currency zone without a corresponding fiscal zone. No respect for the proper and necessary de-leveraging that occurs post bubble as a precondition to returning to growth. No skepticism that additional government plans, non-sovereign commissions and other meetings of the great and good can transmute debt into growth. Nope. Just a hand-wringing despair that the governments should "do something." Because, really, it's all in their hands. Right? ...And if the solution is not in their hands? What then?
The Germans attempted this sort of no retreat, not one inch backward thing at Stalingrad six decades or so past. I seem to recall it ended with Berlin being flattened and then sacked, among many other unpleasant happenings. Extreme stubbornness is a very good thing, until and unless it is a very, VERY bad one.
And yet an editor at this magazine was quoted recently trumpeting the success of Irish austerity.
Lessons are not easy to learn.
For some reason, I'm reminded of a Beethoven story. The bass player complained that his part was too difficult to finger. Beethover's reply was, "The difficulty is all in your head." So true. But that doesn't make seeing the truth easier.
What's noteworthy is how inflation has been steadily increasing as the macroeconomic situation deteriorated. Here're the 12-month moving averages from May 2011 to March 2012:
2.1 2.3 2.3 2.4 2.5 2.6 2.7 2.7 2.7 2.8 2.8
In case you think the tighter labor market in some members may be pulling up the overall figure, here're the numbers for Greece
4.8 4.6 4.3 4.0 3.7 3.5 3.4 3.1 2.9 2.7 2.4
and Spain
2.7 2.8 2.9 3.0 3.0 3.0 3.1 3.1 3.0 2.8 2.7
and Portugal
2.7 2.9 3.0 3.1 3.2 3.3 3.5 3.6 3.5 3.5 3.5
I would say a "Misery Index"-situation is an extreme from of the above. Inflation is known to pick up under "weak administation" situations.
CPI inflation in Greece, Spain and Portugal is compounded by VAT increases: it isn't so much that costs are rising (wages are generally falling, and import cost rises have been modest over the past year) - just that consumers must pay more tax when they buy stuff.
Don't make me look it up, be specific. Which measure of inflation is this? Does it include oil/energy? If so, there's your answer. Also the vat thing.
Those are still very low rates of inflation.
Call it depression, recession, truth is the eurozone economy is going down the crapper, pulled down by the southern EU economies who for years just thought that they could get a free ride on the back of the euro without reforming there state controlled economies.
Nice misinformation spew. Spain ran budget surpluses for five years before the recession.
Spain's problem is they have debt in a "foreign currency". Their spending was not that excessive, it was just done using the wrong money!
Political constraints, limited ECB mandate.
Once Germany is in trouble, the ECB will be free to act.
Quantitative easing is a bad idea (unless we hit inflation under 0.5% - we haven't) - but the ECB could and should (profitably) constrain bond spreads for states that are meeting fiscal criteria (cap interest at 2% above German levels if primary budget is on target). Even better, issue mutualized eurobonds (with constrained issuing rights - whether by an issuing fee that grows with deficit size or some other measure) to resolve liquidity crisis.
Another route needing implementation is to replace national with eurozone financial sector and banking regulation, and having eurozone rather than national responsibility for deposit insurance or any bailouts.
For policy implementation in particular, Merkel can't do any big u-turns (unless really pressed against a wall) before the next German federal election (this September/ October). Things might get more interesting after the election - will there be an SPD/ Green/ Pirate coalition? Some other mix? What policy consensus and compromises would emerge (all three support introduction of a high minimum wage in Germany, which at least would probably boost AD)?
Good post.
Alas I think German elections would be in 2013, not 2012. If memory does not outright fail me, Bundestag terms are 4 years.
Nevertheless, the tide seems to be turning against pro-cyclical, depression-inducing austerity. Not a moment too soon, evidently.
Yep. Off by 1 error.
So, wait for German federal elections in fall of 2013, then several more months before any action. I'd expect something really profound to develop from the youth of Europe who are bearing the burden of this unprecedented catastrophe. 50% unemployment of a cohort for nearly a decade?
The pressure is building on Europe. I read an excellent analysis of the situation in Portugal and Sapin a while back and it suggested that they were in danger of bypassing a recession and heading straight to a depression. Here is an excerpt about Portugal.
"Indeed this reminds me so much of back in 2010 when I was writing that the Greek experience was likely to be much worse than projected. Unless something unexpected happens for the better I expect 2012 and probably 2013 to be dreadful years for Portugal and her economy. I wish that their previous finance minster had taken some note of the alternative strategy that I sent him."
http://www.mindfulmoney.co.uk/wp/shaun-richards/more-evidence-emerges-th...
As time goes by that analysis looks ever more spot on.
Spain's current account deficit has already fallen to 3.9% of GDP - pretty reasonable, considering this doesn't count the massive cash inflows brought by tourists.
Spain's fiscal situation is looking good - despite being at the trough of a deep cycle, the primary deficit's under 4% of GDP.
Spain has more competitive wages and lower taxes than Greece - exports have grown 5% in the past year, despite depression and lack of access to finance. Spain's tax and cost base is already competitive, and is capable of far more near-term growth than Greece was in 2010.
The fact that things are getting worse elsewhere in Europe suggests that there will be more monetary support (and less pressure from high bond yields).
Unless there's a wave of mortgage defaults (if it hasn't happened so far, it probably won't happen), things in Spain will start improving before the end of the year.
It's going to stay ugly for quite a long time - 24% unemployment doesn't vanish. But the trend is onwards and upwards.
To top it off, Spain just issued 2.5bn euros in bonds at 4% (3 year) and 4.75% (5 year) - a little bit pricey, but not excessive (these would be normal rates in non-depression economies).
Spain is in the midst of an awful liquidity and deleveraging crisis, with mild capital flight and a near-complete breakdown in business/ household lending.
But the market clearly doesn't think there's any risk of default. I would tend to agree.
Enough of the hype - fix the structural problems in the European banking/ financial regulation. In a single EU market, there should be a single EU regulator responsible for deposit insurance and any bailouts.
Feeling a bit overdramatic today, are we? Stop hyperventilating, R.A.
It's probably fair to call Greece a depression at this point. To say it's inevitable (under current policy) for Europe? That's a stretch.
Quantitative easing hasn't helped the US much, but it's supposed to save Europe? Yes, I know, you claim it wasn't big enough in the US. That's debatable (at best).
But your last three paragraphs are what's really troubling: "eyes wide open", "institutions that know how and why to prevent things from falling apart and which nonetheless sit back and do nothing." But the only logical conclusion of your overheated rhetoric (they know the consequences of their inaction and yet refuse to act) is that the ECB is acting (or rather, refusing to take action) because of deliberate malice.
Do you actually believe that? If not (and I don't think you do), then dial down the rhetoric a bit.
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.” - Jean-Claude Juncker
We see a flock of politicians, with not a statesman in sight. Not malice. Cowardice.
Could be. That's much more plausible than malice, actually, and more likely to be what R.A. was claiming. But I suspect that the truth is that a solution is not so clear and obvious as R.A. claims.
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.” - Jean-Claude Juncker
Follow the US model.
Give the banks - in this case, the gov'ts -as much money as they want, and do no reforms.
Have the President of the EU and ECB call a meeting with those leaders and tell them all is forgiven and go back to doing what they did before. (Obama/Geithner giving the Wall Street CEO's a pass instead of ripping them a new ... and demanding some heads on pikes,as they did to GM and Chrysler.)
But they already went against the US model.
Some heads of state were booted out, more than the CEO's of Wall Street banks.
NPWFTL
Regards
True, the combination of fiscal stimulus and monetary expansion that the U.S. undertook has proven to have been the correct response to a financial crisis/liquidity trap.
The technical definition of a recession is when your neighbor loses his job. A depression is when you lose your job.
Losing a job would make anyone depressed.
Haven't we had enough of these alarmist, hand-wringing pieces?
Like the movie title says - "There will be blood". Relax - this too shall pass, but only after the EZ is reconfigured by Germany and one or two others departing the Euro. That has to happen sooner or later, doesn't it?
It's a banana, or a kumquat.
"A recession or a banana? In the 19th century, downturns were usually called depressions. However, the term got a bad name in the 1930s and ‘recession’ was coined. Alfred Kahn, one of Jimmy Carter’s economic advisers, was once rebuked by the president for scaring people by talking of looming recession. Mr. Kahn, in his next speech, substituted the word banana for recession.
http://latimesblogs.latimes.com/money_co/2008/05/some-perspectiv.html
Told off for using the word “depression” in public, he replaced it with “banana”, and announced that the country was heading for its worst banana in 45 years. Told off by the head of United Fruit for using “banana”, he made it “kumquat”.
http://www.economist.com/node/17956457
NPWFTL
Regards
It's so hard for many of us human beings to call a spade, a spade!
"many people will write that such a thing was inevitable, unavoidable. They'll be wrong."
It is inevitable with the current lot of leaders and the interests that back them.
Apparently the Germans don't care about the Greeks, Italians, Portugese or Spanish. They're willing to destroy the entire EU, for what? Is this situation good for anyone? The people who want to break up the EU? Isn't there a better way?
The whole situation is unbelievable.
In case you missed "Money, Power, and Wall Street" last night on PBS...
http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/
Click Chapter 3, then advance to 30:00
and watch the last 1/2 hour.
It seems as the gov't of the Greeks, Italians, Portugese or Spanish didn't care in earlier times.
NPWFTL
Regards
My error.
Episode 4, at the 30:00 mark
NPWFTL
Regards
They're willing to destroy the entire EU (or at least the Euro) for what? To avoid being endlessly bled by the Greeks, Italians, Portugese, and/or Spanish.
Even a generous person gets tired of endless need.
Clearly, the Germans do care. They pay enormous amounts into the EU, and support structural transfers to Greece, Southern Italy, Portugal and Spain.
German politicians have also pledged over 400 billion (!) euros (backed by German taxpayers) to support the finances of Greece, Ireland, Portugal and any other eurozone country that applies.
That's a pretty big show of solidarity - and certainly extends far beyond a prudent, cut & run bailout for German banks exposed to periphery asset losses.
Greece/ Ireland/ Portugal begrudge austerity, but austerity is inevitable if bond markets are locked down, unless Germany & other countries impose new taxes or issues masses of debt (neither of which, understandably, has political support).
There are practical structural reforms that would work. Responsibility for financial regulation, bank bailouts and deposit insurance should pass to the EU level (rather than nation states) - that would end the vicious circle of financial sector illiquidity pushing up bond yields and wiping out bank collateral, perpetuating illiquidity... It would also allow for free financial competition across state borders - a big boost to businesses and households in periphery countries. There is no obvious constituency that would oppose this action - it is obviously needed, and should be pursued avidly.
Aside from that, limited eurobond issues (debt mutualisation) would help improve liquidity. This is controversial in Germany, but few politicians have spoke categorically against the idea (though there are constitutional questions in Germany). It could be made to work - and again is worth pursuing.
Overall, the German policy of rigid inflation targeting and prudent budgets is a good one for long run growth throughout the eurozone. The eurozone has outperformed the US in GDP/ capita growth since 2001 - it really isn't all bad. Trustworthy money allows businesses to enter very long term contracts - it's good for confidence. Eurozone inflation is on target, so it would be very costly to implement quantitative easing. The real reason for the collapse in Spanish demand is in the financial system rather than government spending - and it is the banking/ financial system that most urgently needs fixing. A structural shift away from construction is also necessary - and that will happen all the faster if other export businesses have easier access to finance.
The need has nothing to do with southern Europe and everything to do with eastern Germany.
Nor do I appreciate as an Italian the insinuation that Italy will "bleed" Germany; Physician Heal Thyself.
Italy is one of the largest net contributors to the EU budget in Brussels - on a per capita basis, only 10% less than Germany. So large are our net contributions that they cover all the net benefits to the rest of southern Europe so that, as a region, we are a neutral expense to the EU.
Italy is also the third-largest contributor to the bailout fund. We are rated investment grade and we would never default.
The point is not Italy (or Spain) costing Germany money. The point is that the Germanz, like the perfect nation of little shopkeepers they are, are being miserly about pennies when we are risking to lose hundreds of billions in a general Depression.
The right recipe was to GIFT a few billion to Greece from the larger and older members of the EEC (including Italy and Spain) NOT force a 70% default on the private market. This policy has seriously damaged the reputation of all EZ sovereign bonds. Four billion gifted last year from Germany to Greece and two billion gifted this year - with like sums coming from France, Italy, Spain and the Benelux countries - would have been a trifle for western Europe, would have avoided massive losses for the banks that lent to Greece and would have saved the reputation of EZ bonds.
But no, Merkel and the German Right could not stomach the idea of gifting another few billion to Greece to avoid worse problems. Greece had to be punished. The banks had to be punished.
Stupidity. It would have cost Spain and Italy much less to gift a few billion to Greece (or rather, Greece's creditors) rather than paying higher interest on our debt. Of course Germany pursued these policies because in the short term they saw only advantages for themselves.
Likewise, the hypocritical Brits saw no culpability of their own bankers in helping a few crooked and incompetent Greek politicians to hide all that debt from outside scrutiny. Nor did they see any British culpability in creating the Spanish real estate bubble - so also Britain was unwilling to kick in a few billion to avert disaster; "THIS IS A EURO-ZONE PROBLEM!" they screamed.
Sure, that's why, even though the UK has an 8.4% deficit - and devalued the pound sterling by 25% a short time ago, the country's economy is still nose-diving.
Berlusconi, Sarkozy, Merkel and Cameron have led Europe into a Nationalist blind alley. With a strong, ugly undercurrent of religious strife...
Italy has also pledged like sums (on a per capita basis). So what? This is only replacing debt with debt.
Greece needed a few billion in GIFTED assistance. With perhaps smaller sums to help Ireland and Portugal. Divided amongst the larger and older economies of the EC, these sums would have been a trifle.
Instead, Merkozy chose the worst and most expensive way for all to confront the problem: Greek default.
Now, as Lorenzo Bini-Smaghi had predicted, before being forced out of the ECB by national politics, the Greek banks are bankrupt - when in fact they were solid enough until the decision to bring Greece into default. So the Greek economy is still collapsing amidst bank runs.
Idiotic. Sarkozy should be forced out NOW. Merkel should be forced out as soon as possible.
For what it's worth, Merkel will probably go in September.
Greece was running massive budget and current account deficits - I don't see how that can be reconciled with the idea that austerity could ever have been avoided, whatever the level of transition support from the rest of Europe.
The debt situation should have been much better handled. The trouble there is that we had a working assumption that every sovereign was independently responsible, and a treaty that bans mutualisation or bailouts. Alas, mutualisation is one of the few easy solutions. We certainly can't put too much blame on politicians for failing to congure up a new and more appropriate institutional framework - they don't have a good track record at this anywhere.
Unless we have a role model to copy, only by repeated failure do we learn.
I like your emphatic, no-BS statement. It is a view that contrasts starkly with most columns, blog posts and comments contributed by and to the Economist.
I also think you are definitely onto something here.
However I do think that Greece's needs for funding far exceed "a few billions", even if such assistance were a gift and not a loan. The structural impotence of Greek institutions (highlighted by the state's inability to implement and enforce broad-based taxation), combined with flighty and frivolous economic, political and religious elites, makes for a high-maintenance relationship with the rest of the EZ. I second your implicit statement that such on-going assistance would still remain a relative pitance for the EZ, though.
This publication, and in particular this blog, has repeatedly written that the whole Euro crisis would end the moment the ECB came out and said that it would backstop any country on the verge of illiquidity and/or insolvency.
The fiscal tightening currently applied to the area should be accompanied by sensible competitiveness-boosting measures (such as labour market reform, the opening of a broad EU service sector, heavy base-load investment in education and R&D, symbolic infrastructure projects, etc.). Something the ECB should perhaps mention more clearly and loudly than it does today, especially since the political tide is steadily turning against all-out, continent-wide austerity.
And then there is debt-mutualisation.
Tectonic changes are afoot, the only question is whether they will win the race against depression and insolvency. Can political systems, in all their imperfection, keep up with the pace set by bond markets?
"The point is that the Germanz, like the perfect nation of little shopkeepers they are, are being miserly about pennies when (...)."
________________________________
Goodness - you really do have a massive chip on your shoulder, don't you? If you now resort to insulting whole nations (again), I guess you wouldn't object if people returned the favor by calling Italians "the perfect nation of little crooks", would you?
For the record, it has not only been the German government who refused to "just give" Greece etc. the money it demands "for free", but ALL eurozone governments, including ITALY'S.
Fortunately, not everybody in Europe is smoking dope. (And better even, not everybody is a "Little Italiener"... .)
Let me add one factual correction (since you keep repeating this nonsense):
The eurocrisis has absolutely NOTHING to do with East Germany (out of all places!), and all with Greece, Portugal, Spain and Italy paying the price for a decade of overspending and underachievement.
Those countries wanted to share a currency with Germany and the Netherlands in order to profit from the low interest rates those countries enjoyed because they were more trusted debtors – yet they have since been unwilling or unable to enact the economic policies which allowed Germany and the Netherlands to stay competitive, and now act surprised when the markets doubt their abilitity to support their current life-style in the long run.
Even if EU subsidies for East Germany are considered, Germany is still the by far biggest EU net contributor. Germany alone also guarantees 620 billion euros (and counting) of Italian etc. debt via the ECB's target 2 mechanism. In this system, Italy guarantees nothing, but is the biggest guaranteed debtor. If Italy defaults, it will thus be East Germans paying the bill (but not Greeks, Portuguese, Spanish etc.).
It's time to get real here.
No, Italy did not "refuse". The matter was never brought up officially, because direct aid from one EZ country to another is forbidden under ECB rules that Germany insisted upon 15 years ago.
My point is that in a Depression, such rules run counter to common sense.
As for being a nation of shopkeepers, keep in mind that Trieste, Gorizia and most of the towns of northern Italy are exactly that - so I know the dynamic well. The shopkeepers tend their own 50 sq. metres of commercial space well, and do not lift their gaze more than 2 metres from their nose.
Much honour to the shopkeepers - they have a perfectly good excuse to behave like that. But the politicians who claim to represent them do not have a right to behave like ostriches.
As for a perfect nation of little crooks - it may perhaps describe the South. It does not in any way describe northern Italy and I would fail to see how the appellation might be relevant. Northern Italy has other faults...
"Nation of little shopkeepers" v "nation of little crooks": With my retort, I was simply trying to bring home to you that such generalisations always backfire and would invite you try making your point without resorting to such methods in the future.
I don't subscribe to either offensive stereotype, btw.
Thank you for your compliment.
I realise Greece has/had dug a very big hole for itself, but I think we have to re-gain faith in the Maastricht criteria, even if they were incomplete. If we Europeans ourselves do not express confidence in these criteria - or at least amend them if necessary - then we cannot expect nations outside the Euro-zone to respect the process and the numbers.
What I mean to say is that I am convinced it was not and is not necessary for France, Germany, Italy et al. to assume all the debt burdens of the PIG countries (a terrible label); it would have been enough to GIFT just enough money to bring the deficits of all three countries to the Maastricht-mandated 3%. This would have essentially stopped the deterioration in their debt-to-gdp ratios, which still rose sharply last year in all three cases.
Greece's 2011 deficit of 9.1% was 6% of gdp above Maastricht: the difference was under 18 billion in absolute terms.
Portugal's 2011 deficit of 4.2% represented a difference of under 4 billion in real terms.
Ireland's 2011 deficit, with the July bank recapitalisation, was 13.1%, 10% of gdp above Maastricht, but only €15 billion in real terms.
All three together were €36 billion above the Maastricht limit and a substantial debt-to-gdp stabilisation level: 8 billion from Germany, 7 billion from France, 6 billion from Italy 5 billion from Spain and the Benelux countries plus find a few billion left over from allocated but unspent Brussels budget monies for the three countries - and the sovereign debt bonfire was extinguished for this period. These sums would have represented 0.4% of gdp for the larger economies. So instead of a 1% deficit, Germany would have had a 1.4% deficit; Italy 4.3% instead of 3.9%: Big deal.
For 2012, the amounts needed are less than half that, given the debt reduction programmes under way. By 2013, the PIG countries can get to 3% under their own steam. And, no bond interest rates shooting upward for the periphery (and even core) countries.
Plus, this would have bought time for Greece and others to effect some privatisations and use the proceeds to retire debt from the secondary market. WITHOUT A 70% DEFAULT.
The problem is, there is no such thing as forcing a loss on the banks - or declaring default to avoid paying. It is a temporary illusion. Sooner or later, the failed debtor will pay and pay and pay for years to come. Latin America paid by sacrificing an entire generation of growth: look at where their per capita incomes are today as compared to 30 or 50 years ago.
As for your final query - a very good question. I think it takes younger politicians. The older ones are still convinced the lessons they learnt in the 70's can be applied, even in a globalised, internet economy. Our own class of septuagenarian political leaders in Italy is simply afraid of ANY real change at all.