The articles is composed of 3 main parts:
- Fiscal sustainability
Fiscal sustainability is about revenue and expenses, but also about perception. - Method 1: Surrendering sovereign control over budgeting process
When a government asks the IMF to help, tough austerity measures are imposed, a de facto handover of sovereign control to an outside agency - Method 2: Embracing bond market pressures
It requires dealing with the reality that low interest rates must be earned. It also means that governments have to embrace the reality that they may have to renegotiate some of their debt.
The conclusion is that we should "expect a muddled combination of increased IMF support, increased fiscal convergence, increased focus on strengthening bank balance sheets, increased involvement to keep banks afloat (the ECB is already debating providing multi-year unlimited credit lines), and increased cost of borrowing for Germany. However, this is likely to remain a drawn out process and the tail risks that European policy makers mess this up cannot be ignored, either. We come back to our initial argument: a lot depends on perception. Perception is a function of leadership and a credible path that is likely to lead to results. The prime minister-elect of Spain wasted his first opportunity to make a good impression. The German psyche has been badly wounded by the botched auction. In typical European fashion, another summit has been announced to discuss closer fiscal integration. In case anyone wonders why this process is so painful, it is because the right decisions are politically so incredibly difficult to make."
The full "guide" can be read at http://www.merkfunds.com/merk-perspective/insights/2011-11-30.html