Thursday, June 28, 2012

Saving the Euro and Printing Money

Does Germany actually benefit from the Euro?

This is a question many people in Germany are asking (39% of Germans are no longer in favour of the Euro. In Germany the issue is often framed in terms of how much the bailouts will cost. But, another very important issue is the extent to which the German export sector have benefited from an undervaluation in their exports. If Germany left the Euro, the D-Mark would considerably appreciate, reducing the competitiveness of German exports - and helping to reduce the large German current account surplus.
What Policies are needed to save the Euro?

There are different approaches. Some frame the question as either debt pooling (fiscal union) or printing money to buy bonds and prevent rising bond yields) To save the Euro, there needs to be a combination of some or all of the following:
  1. Joint liability of European debt. Eurobonds where debt is pooled.
  2. Direct recapitalisation of European banks
  3. Printing Money to buy bonds and provide liquidity for governments facing liquidity crisis.
  4. Economic growth to give countries a chance to improve tax revenues and reduce debt / GDP ratios
  5. Restoring competitiveness amongst peripheral Eurozone countries who are struggling in the fixed exchange rate of the Euro.
  6. Structural reform / supply side policies which improves tax collection and improves productivity and competitiveness.
 To Print or Not to Print?

The big question for Central Banks is should they be printing money, and if so how much?
Would it help to if Italians and Greeks bought Italian and Greek Bonds?

The Recession and Trend Rate of Growth


Will the UK ever recover the lost output of this recession? Has the recession reduced the long-run trend rate? Is the economic downturn actually a supply side phenomenon?

Readers Questions

Debt as % of GDP in G7


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