Monday, August 15, 2011

A three-pillar solution to the Eurozone crisis

by Javier Suarez


August 15, 2011

The current Eurozone crisis shows no sign of abating. This column proposes a solution built on three pillars: A Eurozone Charter, a Eurobond Programme, and a Debt Restructuring Programme for insolvent countries.

In the current situation of the Eurozone, both the cost and the availability of market funding to financial institutions depend positively on the spreads and availability of funding faced by the national governments of the countries where these firms are domiciled.1 This is the source of a strong de facto segmentation of financial markets which produces large asymmetries to the cost and availability of credit across countries, interacts negatively with the doubts about the state of government finances, and constitutes a tangible threat to economic recovery—especially for the weakest economies.

In the closer-to-ideal US monetary union, the situation is very different. The risk of default of a state government does not damage the integration of the US capital markets and is not a threat to the US dollar as the union’s single currency. One key difference is that the US has a strong federal government. However, the possibility that the federal government bails out a state government is not the main reason why the US is more resilient than the Eurozone to concerns regarding the solvency of its member states. There are important differences regarding financial architecture which are worth stressing.


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