Alternative solutions to the euro zone debt crisis?

censuspro

I know this is a hypothetical thread but what are the alternatives to the current euro zone debt crisis. Is pumping more cash into the fund really going to make much of a difference and at what stage does are we into diminishing returns.

McDave

The EFSF doesn't necessarily mean pumping cash (although it obviously is). It's meant as a war chest. Also it's a statement to the markets that the Eurozone has faith in its judgement on the problem member countries. And if the markets are not prepared to price loans to Eurozone countries at a reasonable rate, then the EFSF will do the job. Accordingly, the EFSF rate will become the *ceiling* for interest rates.

In the meantime, the Eurozone (and the markets, to be fair) are putting pressure on the 'problem' economies to get their affairs in order.

It's my view that the solution to the Eurozone crisis is relatively simple in conception:

- Pressurise member countries to eliminate budget deficits and get their national debts down to 60%; and
- Beef up the EFSF to the necessary scale.

When the markets see that the Eurozone countries are in fact rectifying their finances (think our upcoming budget), they'll return to sovereign lending. Although it has to be said that over time, there's going to be less and less business with Eurozone countries as their debts diminish.

There are other ancillary considerations such as financial regulation too. But the main event is to balance the circumstances of the sovereigns.

Sorry I'm not suggesting alternatives. I think that what the Eurozone already has in mind (albeit with delays in implementation) is pretty convincing already. IMO the coming months will bear fruit in this regard.

irishh_bob

McDave wrote: »

The EFSF doesn't necessarily mean pumping cash (although it obviously is). It's meant as a war chest. Also it's a statement to the markets that the Eurozone has faith in its judgement on the problem member countries. And if the markets are not prepared to price loans to Eurozone countries at a reasonable rate, then the EFSF will do the job. Accordingly, the EFSF rate will become the *ceiling* for interest rates.

In the meantime, the Eurozone (and the markets, to be fair) are putting pressure on the 'problem' economies to get their affairs in order.

It's my view that the solution to the Eurozone crisis is relatively simple in conception:

- Pressurise member countries to eliminate budget deficits and get their national debts down to 60%; and
- Beef up the EFSF to the necessary scale.

When the markets see that the Eurozone countries are in fact rectifying their finances (think our upcoming budget), they'll return to sovereign lending. Although it has to be said that over time, there's going to be less and less business with Eurozone countries as their debts diminish.

There are other ancillary considerations such as financial regulation too. But the main event is to balance the circumstances of the sovereigns.

Sorry I'm not suggesting alternatives. I think that what the Eurozone already has in mind (albeit with delays in implementation) is pretty convincing already. IMO the coming months will bear fruit in this regard.

how can they strengthen the defenses of the soverigns without inflating away the debt through QE ?

McDave

irishh_bob wrote: »

how can they strengthen the defenses of the soverigns without inflating away the debt through QE ?

QE as a significant policy response will pretty much excluded from the agenda of any Eurozone Germany's in. Their approach is to control costs to maintain international competitiveness.

It's probably fair to say (or at least argue) that the 'West' has been overconsuming and overpaying itself for probably 20 years. Germany is one of the few countries that has avoided this course, largely as a result of the realities imposed on it by unification and a direct exposure to potential labour competition with eastern Europe. In the meantime, the so-called BRICs have moved into strong economic positions not just from the labour perspective, but in competing for the raw materials the West had a clear run at since the Industrial Revolution.

In short, it's foolhardy to inflate economies out of crisis. Better by far to point economies in the direction of facing competition head on. It's very possible that QE has stuffed the US. It could also be in the process of stuffing the UK. I don't think the Eurozone should make the same mistake. The potential payoff is enormous if it can match its spending to its actual earnings.

McDave

irishh_bob wrote: »

how can they strengthen the defenses of the soverigns without inflating away the debt through QE ?

Or putting it another way, most Eurozonians should accept they're actually worth less than they think they are. Some have more adapting to do than others.

Amberman

There are always alternatives to the European debt problems.

Swiss franc chart over the last 3 years.

The uncertainty is almost over. Simply a matter now of Eurobond or bust.