What is the current state of sovereign credit risk across the Eurozone? Does the recent fiscal crisis extend to other (non-Eurozone) countries? Is Greece the centre of the problem? How did the current fiscal crisis in the Euro area start? Who is behind it? How can it evolve? How can it be addressed? And, is a fiscally challenged country likely to want to leave the Eurozone? This article addresses these questions, argues that a fiscally weak country is better off in the Eurozone than outside it, and finds that a feasible policy tool can be a bailout associated with tough fiscal conditionality. It also shows that sovereign credit risk adjustment in the Eurozone can happen, using various measures, but not without ‘fiscal pain’.

This paper aims to highlight key limitations of The Economist magazine’s Big Mac Index (BMI). The Economist markets the BMI as a tool to determine valuation of currencies. This paper shows that the BMI is a misleading measure of currency valuation for economies whose markets are structurally different from the benchmark currency countries.