I don’t think it is an exaggeration to say the next few weeks will be make or break for the euro zone. Four elements should be kept in mind:
1. Lacking a reliable lender of last resort to (large) states, the creditworthiness of countries with large debts and uncertain growth prospects is extremely fragile. Where any doubts exist about solvency, it is easy to shift to bad equilibrium, even where it is very likely that the state would not default if interest rates stay low. Ryan Avent at the Economist provides a good analysis here.
2. Introducing a credible lender of last resort creates big transfer-risk externalities. All euro zone countries should be wary of such a lender without some central controls on fiscal policies.
3. Even absent the need for central controls, euro zone countries would benefit from stronger national fiscal frameworks given the propensity to (structural) deficit bias. And some degree of external surveillance and enforcement can help to make those frameworks more credible. The cost of central controls should not be exaggerated.
4. It will be much harder to pull out of the crisis without the use of growth oriented macroeconomic policies where they are feasible. This applies to fiscal policy in countries where some degree of fiscal space exists, monetary policy and macro prudential policy.