In my view John Cochrane sums it all up – especially the alternatives that remain:
By arithmetic, here are the options:
1) Government default. (Restructuring, really) If done right away, this would have meant private-sector losses. Now that so much debt has been rolled in to banks, it means bank failures too.
2) The Germans pay for everything. Not happening. There is not enough taxing power in Germany to repay the entire debt of Portugal, Spain, Italy, and Greece, plus their banks losses and their ongoing deficits.
3) The ECB buys up the sovereign debt, or lends to banks on sovereign “collateral,” effectively doing the same. By turning trillions of debt in to money, we get inflation. Inflation engineers the sovereign default and bank debt default implicitly.
4) Shock liberalization, privatization, freeing of markets, selling state assets. Remove the highly distorting taxes of the “austerity” plans, which said loudly “don’t start businesses here, don’t hire anyone here, and if you have some wealth I suggest you get it to the Bahamas ASAP.” Return quickly to strong real growth. Pay back the debt. Fairly radical reform of unsustainable entitlements.
My obvious choice is number 4. The Europeans’ most likely choice is number 3. It can be sold as “stimulus” and “liquidity provision,” and it kicks the can down the road. The inflation won’t happen for several years. Then it will be easy to blame speculators and hoarders and markets and expectations and so on.
Or something that is not very much appreciated in the public debate here, namely that a monetary union without a fiscal union is entirely possible. This means our politicians who make the public believe otherwise are liars or idiots (neither thought is comforting):
1. The euro was explicitly set up as a currency union without a fiscal union. (And it turned in to one without a bank regulatory union.) That can work, a fact which practically all commentators ignore.
The central ingredient is: sovereigns who can’t pay their bills default. The European central bank does not print up euros to bail out sovereign creditors, either directly or via the subterfuge of lending to banks who then buy the sovereign debt.
The euro was explicitly set up this way. The main problem is, when the crisis came, nobody bothered to read the instruction manual.
Here is the full piece by Nouriel Roubini and Niall Fergusson in the Spiegel in English. It’s actually more reasonable than the short piece that was published in the Spiegel and that got me ranting, but I still have serious reservations about their quasi-mercantilist view of exports.