The Best of Two Worlds

So apparently there are only two approaches the ECB can take regarding the European debt crisis. This fits very well with the extreme opposites politicians like to adopt, when facing off. For instance, in the French elections.

1 European countries should suck up the pain and cut their budgets to get out of the crisis. The ECB is not a lender of last resort and that's that. This is the only way to ensure the efficiency of governments and prevent fiscal profligacy. The changes in Italy represent this: without the debt crisis, they would have never taken place.


2 The ECB should buy up government paper through 'quantitative easing' policies. The indirect approach (through lending to the banks at bottom rates, thereby stabilizing the banks books) will just not do.


The first approach is self-defeating. Being too fiscally conservative in a time of obvious lack of liquidity will hurt millions and will not restore any measure of stability any time soon. But it has something going for it. There is need for political pressure on the inefficiency of a good number of European countries. The way Greece and Italy used to collect taxes while maintaining a ballooning deficit, for instance, was irresponsible.

Yet some of these countries are in such bad shape, that mere fiscal conservatism will not save the day, any longer. These countries have to be shielded from market conditions by one of the only players that is capable of doing so efficiently and at a low cost. The political fallout of these decisions are tremendous, and the decision-making process to achieve them tenuous. But they are the only likely way countries like Spain and Italy, let alone their more troubled cousins, will be able to pay off their debt.

There has to be pro-growth reform and more efficient taxation in these countries. But this has to be combines by a programme where the ECB becomes a guarantor for their debt. If the borrowing costs of these countries would be lowered to one percent, the savings would be enormous, could improve the deficits of these countries and stave off structural cuts that will hurt their economies in the long term and hurt basic services to citizens. Cuts will still have to be made and people will still suffer, but not nearly as much. Most importantly, this will allow governments to actually engage in some investments, to kickstart the economy.