Solvency has become a big issue for Greece because of a cocktail of high current debt levels, large primary fiscal deficits, high interest rates and negative growth prospects. There are serious reasons to doubt that the country will be able to repay its debt entirely, even if it implements in full the large and protracted budgetary adjustment now on the table, and regains competitiveness. Other eurozone countries face difficulties of a similar nature if not of similar acuteness. The issue has a strong European Union-wide dimension as public debt is largely held by residents of other EU countries. So the question arises: how should the eurozone deal with debt restructuring by one of its members?

Although the question is starting to be openly recognised, it is generally considered too early to contemplate restructuring Greek debt, because of a risk of contagion to other EU countries and because partner countries want first to see thorough action on the part of Athens. What is regarded as the best strategy for now is to implement a stabilisation package, with EU and International Monetary Fund support, which would accompany and foster domestic efforts.

With or without debt restructuring, Athens has to cut spending aggressively, raise revenue and redirect both spending and revenue to foster growth for years to come. But the EU should not run the risk of again being behind the curve. Given the likelihood of debt restructuring down the road, it should waste no time in designing a European debt resolution mechanism to help members with unsustainable debt to resolve it with their creditors in an orderly way. This should go hand in hand with reform of the crisis prevention regime, which is sorely in need of repair.