Vox
September 26, 2011
Last weekend, Eurozone policymakers were shaken into admitting that something more needs to be done to save the Eurozone and avoid a major crisis that would reverberate around the world. This column proposes a three-step solution to finally end the crisis.
The annual gathering of finance ministers and central bank governors at the IMF/World Bank meetings in Washington seems to have been an epiphany for Eurozone leaders. Finally, there seems to be agreement that their July 2011 agreement was insufficient (Reuters 2011).
In a previous Vox column, I sketched a way of stopping the public debt crisis that is engulfing the Eurozone (Wyplosz 2011). Here I develop this idea into a coherent proposal that, if adopted, would immediately stop the rot.
The proposed solution would:
- Get Eurozone governments out in front of the markets by setting a floor on the price of public debt;
- Allow distressed governments to both reduce their debt burdens and recover access to market funding; and
- Deal with the moral hazard issue that mesmerises German taxpayers.
It involves three steps and no cost, because it works like bank deposit guarantees – as long as they are credible, they don’t get used because they eliminate bank runs. In the current situation, however, what we need to stop is a run on public debt.
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