Looks to me to be getting more desperate with increasing rhetorical nonsense.

Higher deficits due to falling revenues and rising transfer payments simultaneously weaken both the euro and national govt credit worthiness in a race against time.

And any budget cuts will only further cut aggregate demand and output, cut already falling tax revenues,
and increase unemployment and transfer payments, adding to deficits and further eroding creditworthiness.

The only hope is for a quick enough recovery that brings down deficits through exports, or, evern more unlikely, through domestic credit expansion, before the rapidly deteriorating national govt credit worthiness results in systemic failure of the payments system.

The ramifications of a banking sytem where deposits are guaranteed only by the national govts as yet
to make front page discussion, but nonetheless this structural flaw remains an ongoing source of system
risk capable of shutting down the entire euro payments system.

My proposal for an immediate and annual distribution of 1 trillion euro from the ECB to the national govts on a per capita basis will end the crisis and provide the framework for the national govt credit worthiness needed to reverse current downward spiral.

And not only does it not introduce moral hazard risk, it does the reverse by allowing
for withholding of future payments for non compliance of EU mandates.

Germany’s IG Metall, Employers Agree on Pay, Job Security

German States’ Budget Deficit Increases, Handelsblatt Reports

France’s Lagarde Sees ‘Fragile, Painstaking’ Economic Recovery

Isae Raises Italy’s 2010 Growth Forecast to 1% on Exports

Premier Insists Spain’s Economic Recovery Is Near but Offers Few Details

3 Responses

  1. As long as things don’t get out of hand, such as a breakdown in the payments system, the Germans and the French may view the Greek crisis as an opportunity for a defacto devaluation of the Euro.

    Once the Euro is weak, they can then come in and backstop Greek debt or restructure the EU fiscal constitution. But bailing Greece out now may help stabilize the Euro at levels they deem too high to sustain exports and overall AD, given the constraints on domestic spending.

    1. Knapp,

      This is exactly my view. They want the EUR to fall vs. the USD and JPY.

      I also think they (the Germans and French) might even allow Greece to default on their debt and bailout the system at the banking level. This would have the advantage of allowing them to pick and choose who they distribute money to. For example, Goldman Sachs wouldn’t see any Euros from the default, but any Italian, German, French, or Swiss banks would.

      Knapp, feel free to contact Sada and get my email.

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