October 27, 2011
Under the principle of Occam's razor, every assumption is shaved away until – in Russell's phrase – as much as possible is explained by known entities, and reliance on unknown entities is reduced to the minimum. In fashioning a response to the woes of its currency, Europe has taken the opposite tack. The continent's leaders emerged bleary-eyed into yesterday's grey Brussels dawn not with straightforward orders to institutions which actually exist, but with baffling plans to magic money out of somewhere. It is to be very much hoped that their fiendishly complex plan can be delivered, since the alternative is certain depression. Despite an excited reaction on the markets yesterday, however, the obstacles to success are legion.
The straightforward solution to the debt crisis spreading like a plague across the continent's south would be for the European Central Bank to promise to purchase bonds without any arbitrary limit from every solvent but distressed sovereign. That would not include Greece, since by any realistic assessment it is already bust: it would still need bespoke arrangements. For the rest, the ECB should say it stands ready to create whatever currency is required to salvage the debt. Yes, there would need to be surveillance so the likes of Rome did not respond with wild spending sprees. And yes, it would be important to keep half an eye on the theoretical danger of sparking a wage-price spiral. Currently, however, this risk is remote: strip out yo-yoing commodity costs, and European prices are stuck on the floor. So too is the broad money supply, although – 90 years after Germany's printing presses last whirred with abandon – the experience remains so deeply seared in the psyche that Berlin cannot grasp that in these crunched-up conditions the creation of cash is a force for stability.