What Would It Take To Save Europe? By Simon Johnson Last weekend official Washington was gripped by euphoria, at least briefly, as people attending the IMF annual meetings began to talk about how much money it would take to stabilize the situation in Europe.
At least one eminence grise suggested that 1.5 trillion euros should do the trick, while others were more inclined to err on the side of caution – 4 trillion euros was the highest estimate I heard. This is a lot of money: Germany’s annual Gross Domestic Product (GDP) is only about 2.5 trillion euros, and the combined GDP of the entire eurozone is about 9.5 trillion euros. The idea is that providing a massive package of financial support would “awe” the markets “into submission” – meaning that people would stop selling their holdings of Italian or Spanish debt and thus stop pushing up interest rates.
Ideally, investors would also give Greece and Portugal some time to find their way to back to growth. Beyond fiscal federalism: What will it take to save to euro? High debt levels, house price booms, uncompetitive labour markets – the list of possible reasons why some European countries are facing the wrath of the market are many.
This column argues that they all boil down to one measure – inflation. Using the inflation differentials as a guide is the first step to seeing what countries need to adjust – and by how much. The euro was created on the premise that no extreme country-specific imbalance would ever pose a threat to the stability of the common currency area. An intergovernmental covenant on the Stability and Growth Pact was considered, on its own, to be sufficient. But recent crises in euro bond markets have highlighted the structural problems and the deficiencies of the euro architecture.
Does the Euro Have a Future? by George Soros. The euro crisis is a direct consequence of the crash of 2008.
When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed.