Financial Stability News

Flashing news about financial stability and central banking

How to end the Euro crisis

Prof Wyploz has a VOX post today where he discusses the outlook for 2012. He notes that it looks pretty grim. The question is how we got into this mess and how to get out again. He observes that it should concern us that policy makers don’t seem to have a clue, and what they have done so far have generally been too little and too late.

The amazing sight of policymakers apparently overwhelmed by the problems that they face is undoubtedly the most worrisome aspect of the crisis. There is little doubt that financial crises are complex events. They require an understanding of financial markets and of multiple equilibria. No one expects politicians to spontaneously master this kind of knowledge, but we would hope that they are adequately briefed and that their proposals are thoroughly evaluated before they are put forward. Unfortunately, this has not been the case, and the question is why.

He suggests a combination of measures, including recapitalization of banks, before their sovereign default (which by necessity will happen to some countries in the Euro zone).

Also, the ECB should stop its “religious discussions” and start supporting the Euro by providing liquidity to banks on the back of treasury paper only (issued by fiscally responsible countries, determined by an independent board). I.e. no need for treaty changes that will take years to accomplish.

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