Megan Greene: This is not a fiscal or debt crisis, but a growth crisis
There are a number of myths surrounding the eurozone crisis, but none so misguided as the myth that this is a fiscal or a debt crisis. This is above all else a growth crisis.
Paul Krugman is absolutely right to highlight the trade-off between austerity and growth in deeming Europe's approach to the crisis "economic suicide". Growth heals all economic wounds, and without it austerity becomes completely self-defeating.
This trade-off between austerity and growth was crystal clear in Ireland in late 2010. In November 2010, investors waited on tenterhooks to discover the size of the fiscal adjustment the government would announce in the 2011 Budget. Some expected a huge adjustment would show the markets that the government was serious about putting itself back on a path towards fiscal sustainability. But many investors fretted about the impact of a swingeing adjustment on economic growth.
No matter what the Irish government did, it could not regain market confidence, and Ireland was forced into an EU/IMF bailout within weeks.
Unfortunately, eurozone leaders have not learnt their lesson. In continuing to pursue austerity as a policy, they have pushed the Spanish government into exactly the same position.
With Spanish government bond yields rising in the past few weeks, the Spanish government responded by announcing additional austerity measures in mid-April. Bond yields only rose further as investors worried how Spain would ever grow while making such a huge fiscal adjustment.
As with Ireland, in the absence of economic growth, there is no way for the Spanish government to regain investor confidence.
And as long as Spain is forced to retrench at every level of society -- government, banks, companies and households -- there will be no growth.
It therefore seems inevitable that Spain will need a bailout. Initially, Spain may seek to use EU/IMF money to bail out its banks, but eventually the Spanish sovereign will need official support, too.
Bailout programmes buy time, but can they buy enough time for the weaker eurozone countries to implement structural reforms and have them bite and support growth? I doubt it.
If weaker eurozone countries are forced to retrench further and go deeper into recession, we will see some countries choose to exit the eurozone. It won't be a question of fiscal sustainability, but one of growth.
According to the current eurozone crisis response of austerity as a way to undergo an internal devaluation and regain competitiveness, the weaker countries could face a decade of depression before they return to sustainable growth. Alternatively, they could abandon the eurozone and return to growth much more quickly.
Both options would be messy and painful, but as peripheral governments pass their umpteenth austerity budget, support for the latter will undoubtedly rise, and countries will choose to abandon the common currency.
Megan Greene is the Director of European Economics at Roubini Global Economics. You can read some of her analysis at www.economistmeg.com; Twitter: @economistmeg