New solutions are required if debt-stricken EU members are to manage austerity measures whilst displaying growth, according to Pimco.
There is high uncertainty about the future debt dynamics of the Economic and Monetary Union’s fiscally challenged countries based on fiscal austerity measures and a lack of an exchange rate flexibility precluding higher growth.
Andrew Bosomworth, the executive vice president of Pimco Europe, says the European sovereign crisis will end when the hidden losses of unsustainable debt burdens, whether real or perceived, are either crystallised, socialised or earned away via higher growth.
Bosomworth recommends the European Stability Mechanism proposed by Germany be activated sooner than its current date of 2013, as the current system of providing liquidity is only delaying problems and fails to re-inspire competitiveness. (article continues below)
Equally, uncertainty about the future value of bonds issued by countries with high levels of debt could prevent interest rates from falling.
Bosomworth stops short of recommending the worst affected countries leave the euro, describing it as the last possible option that should be considered.