Three years into the euro area sovereigndebt crisis, investors continue to shun periphery governmentbonds, European banks are under severe funding pressures inboth the dollar and euro private term markets, and the euroarea is facing an anemic growth outlook. On the face of it,the scenario portends gloom. But upon closer examination ofthe inner workings of the European Union (EU) governancesystem, the ongoing adjustment in the banking sector, andthe rewiring of the landscape of euro sovereign debtmarkets, the future scenario looks more balanced,particularly following the conclusion of the protractednegotiations on Greek bond exchanges under an EU-backedvoluntary private sector involvement (PSI) scheme. As euroarea leaders formulate significant structural reforms todeal with the continent's longstanding fiscal andgovernance shortcomings, this note argues that striking abalance between market disciplines and centralizedrule-making is the best way forward.
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