While the financial markets wait with keen anticipation it does seem from studying the entrails of reports emanating from Brussels that the long awaited made in Europe solution to the sovereign debt crisis triggered by the spectre of the failure of Greece unleashing a chain reaction in Europe and abroad of falling financial dominoes is about to be announced.
The solution is composed of various strategies and initiatives. These include: the European central Bank buying up a portion of the sovereign debt in play; the more than doubling of the size of the European financial stability fund to over 1 trillion € ; the shoring up private bank capital by raising the target ceiling of tier one capital to 9 %; the possible involvement of offshore countries like China in contributing to the purchase of sovereign debt; the arranging of a substantial haircut on existing bondholders’ returns; the long run target for the Greek debt to GDP ratio of 120 % by 2020 down from 186 % in 2013. These are all good measures(although the target may be too severe a reduction in such a short time) which should help calm the nervous markets but they must also be accompanied by some easing of the austerity program in Greece to provide both a measure of relief to Greece’s people and permit Greece to recover the path to economic growth.
For ultimately it is economic growth that will spur the solution to the debt burden by shrinking the weight of sovereign debt in the GDP. We shall see what tomorrow brings but these are hopeful signs that Europe has risen to the occasion and thereby strengthened its unity and economic coherence.
I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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Hi, I am intrigued by this post, because while we seem to share the same vision of how the crisis has evolved (I just commented on your post about Keynes), we diverge on the interpretation of the crisis. In a post I wrote this morning I stated that I really do not believe that the crucial elements of EMU fragility were addressed by the summit. I’d like to know what is the source of your optimism.
Thanks for your comments. I agree that the response is far from perfect. the emphasis upon continued austerity is definitely a bad aspect. but if we examine how far along the path toward a a more sensible policy response Europe has come since their original hard line position against any sort of collective response and adamant opposition to any sort of use of the ECB to acquire sovereign debt to ease interest rates and lighten the debt burden I think we have to acknowledge some progress in the right direction. By nature i am an optimist, it takes one to have defended Keynes and Keynesian doctrine for as long as I have always arguing against implacable opposition that he and his work still had a lot to teach us about how to best manage the business cycle in a capitalist economy. So I accept your point that they should have gone further but I prefer to encourage the direction in which they have headed. We shall see in the coming months what further measures are required. Certainly an abandonment of austerity as a strategy should happen as quickly as possible and the ECB should be prepared to acquire more debt in order to shock speculators and maintain low interest rates.