Path out of eurozone crisis spells prolonged economic pain

"On current policy trends, a wave of sovereign defaults and bank failures are unavoidable. Much of the currency union faces depression and deflation," wrote Simon Tilford and Philip Whyte in a new paper for the CER.

What is needed, Tilford and Whyte argue, is easier policy by the ECB, including a higher inflation target of 3 percent that would enable deficit countries to regain competitiveness by holding down wage growth without slumping into deflation. Critically, the burden of adjusting current account imbalances must also be shared more evenly. If every country saves more, as is the present prescription, demand across the euro zone will drop further, hitting already weak public finances. Coordination of tax-and-spending policies is thus imperative. "A new fiscal regime needs to be accompanied by a symmetric imbalances procedure. Countries with imbalances will have to demonstrate how they intend to close them, with the onus being as much on those running trade surpluses as those with deficits," Tilford and Whyte conclude.