European leaders decide to postpone the announcement of their decisions until Wednesday. I gather from this that there is no consensus yet on how to push Europe out of the current slump.
Here are the three main questions for the EU leaders:
1) How to solve the sovereign debt countries?
2) Should government step in and capitalize the banks in Europe?
3) How to push the economy out of the current economic malaise?
Very simple questions actually. Unfortunately there are many answers.
For example the debt crisis can be solved by: default, restructuring or debt forgiveness. Or the banks can be capitalized by the government or allowed to compete for funds in the market. And regarding the economy fiscal stimulus might work in the short term and long periods of monetary stimulus might help in the short term but could cost you dearly in the future (i.e. inflation and high interest rates).
Yes, there are many answers but the task of choosing the right one is not that daunting. To me the whole issue is a preference one: market or government solutions.
Once EU leaders agree on which “force” should be involved in drawing the solutions the answers will be obvious. However, within EUROPE both “forces”, market and government, have strong supporters and this is why EU leaders are stuck for two years without a concrete solution.
Those reading my blog know I favor market solutions to market problems. But I know I am in the minority in today’s world. So, I just keep my fingers crossed that as always a bad government solution will be corrected by the market eventually.
For what is worth I expect:
1) 80% debt restructuring for Greece
2) Some form of government funds will be involved in capitalizing some of Europe’s banks
3) We will witness both increase in government spending, fiscal stimulus, and a prolonged period of low interest rates from ECB, monetary stimulus.
P.S. It is ironic that 20 years after the fall of communism Eastern Europe resembles more a market economy than does Western Europe?