EU crisis is not lack of liquidity but solvency

WITH every day that passes the fault lines within Europe become clearer and wider.

Germany’s Chancellor Angela Merkel now appears to be increasingly isolated, reminiscent of the Irish mother looking at children walking up and down the road saying “sure they’re all out of step apart from my Johnny” over how the crisis should be resolved.

There is a problem in my opinion of misdiagnosis of the crisis. Proposals have been put forward on the assumption that what European sovereigns are facing is a crisis of liquidity. It is reminiscent of the Irish government’s responses in 2008 and early 2009. Then we recall that the assumption was that Irish banks were suffering from a lack of liquidity when it was eminently clear that what they were suffering from was a lack of solvency. In the case of several European countries — Greece for the most part but perhaps also Ireland — solvency is the issue.