Save the Euro, for God's sake!

I think this  really deserves some publicity.

Twelve european top economists just published a dramatic appeal on VoxEU.org. In terse words, they describe that the single currency is at stake and urge EU leaders to save the Euro. They implore them to

“ to take decisive action this week, any more delays could mark the end of the Eurozone as we know it.”

They argue that the debt crisis has reached the core of the Eurozone and refer to the fact that Italy and Span are now directly affected. Additionally, they point out that the creditworthiness “of more than one-third of the Eurozone is being challenged” and stress:

“For the first time, the very survival of the euro is at stake.

EU leaders gathering in Brussels on Thursday face a historical responsibility.

It is essential that an agreement be reached on a plan that prevents further escalation of the crisis.”

So what should politicians do? The economists argue that the European Financial Stability Facility (EFSF) should be expanded. It should “be able to make banks strong enough to withstand a default by Greece.” The EFSF should also be able to buy government bonds on the secondary market and “be given operational flexibility and independence”.

However, details do not matter at this point of time, as the economists argue:

“The important thing is to acknowledge that leaders are out of time. Deciding to not decide could mark the end of the Eurozone as we know it.”

The appeal is entitled “A call to action: EU leaders must act to save the euro and avoid a recession” and signed by Angelo BaglioniRichard BaldwinTito BoeriPaul De GrauweJuan DoladoLuis GaricanoFrancesco GiavazziDaniel GrosJean Pisani-FerryRichard Portes,  Guido Tabellini and Beatrice Weder di Mauro.

I think they really have a point. Let’s hope that Angela Merkel and Wolfgang Schäuble have a look at the letter.

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3 Responses to Save the Euro, for God's sake!

  1. Pingback: Protesilaos Stavrou on current issues » Blog Archive » EU summit must produce a European Solution – Not a second Greek bailout

  2. A moderate amount of perspective is required on this issue. Extraordinary times call for extraordinary measures (this was said in respect of previously unheard of bailouts for private companies). The eurozone has a current account surplus, low inflation and an over-valued currency (at least going by the IMF”s Purchasing Power Parity estimate — see April 2011 WEO). The ECB could monetize the excess debt of the troubled countries (for the sake of argument, define this as the portion above the Maastricht guidelines) by buying the excess debt (at the newly deflated value) and simply writing it off (debt jubilee — a millennia-honored tradition). Credibility problem for the euro? As noted, governments do this for systemically important companies all the time (so much for moral hazard). The amounts involved in writing off excess debt of the troubled sovereigns would not be of a different order of magnitude. But if markets flutter, let it be–it will only reduce the over-valuation of the euro. And remember, the bedrock of any currency is its global trade performance and the eurozone is fine in this regard now, and would do even better with a lower currency valuation. Europe could take the depreciation and laugh all the way to the bank. Speculation against currencies based on government excessive debt is based on the risk of monetization and in this case the measures actually decisively dismiss this concern by resolving the excess debt. So what would be the inflation consequences? In a global context where the supply shock from China and India continues unabated, they would be trivial. In fact, some inflationary acceleration should be preferred to the deflationary consequences of fiscal austerity at a time of excess capacity and excessively low interest rates that are trying to offset deflationary pressures (think of it as QE4 — a way to pre-emptively avoid euro interest rates from being forced down to the zero bound from untimely pro-cyclical fiscal restraint). But realize that ECB-issued euros in exchange for bonds would flow into investment accounts and not into transactions balances; and even if they eventually went entirely into transactions balances (with the usual 2-3 year lag), what would a several hundred billion expansion of the money supply in an economy of about $13,000 billion mean for consumer price growth? Do the math and you’ll find the inflation risks are trivial. And as for the look on the face of the euro short-sellers? Priceless.

  3. Pingback: Save the Euro, for God’s sake! » Greece on WEB