EU has to choose: market or government solutions?

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?

4 thoughts on “EU has to choose: market or government solutions?

  1. The EU is a mess! and eastern European policymakers have no idea! With regard to recapitalizing the European banks, I don’t see how that can be done without outside EU money since the new capital should presumably absorb the expected losses on the government bonds once Greece is officially in default and Italian etc bonds get a haircut. Disregarding the idea that the Chinese government might go into a bank shopping fever in the EU, the only outside source would be the IMF. In the market many of those banks would aready be bankrupt.

    1. Well, you are right about the mess. About banks, it can be done through loans from governments.What is another 200 million euros next to the 2 or e trillions needed to calm down “blood thirsty speculators” in the short term?
      I am at peace with the government intervention as I do not see any force coming from the right side of the political spectrum to stop it. I just hope the loans to the banking sector will have some conditions attached.
      One of them should be to break up the current oligopoly they are enjoying.
      Also, I want more to be done in the sense of real punishment if there is lying in the reporting, or hiding bad deals, or false management structures which can allow for front running clients or insider trading.
      I think fear of going to prison is a bigger deterrent than paying a fine.

  2. I agree with your statements, but I do have a comment to make on point “3) We will witness both increase in government spending, fiscal stimulus, and a prolonged period of low interest rates from ECB, monetary stimulus.”

    The EU periphery is adjusting through deflation in asset prices and salaries. Unless government spending can generate inflation or at least inflation expectations ( which coupled with low nominal interesat rates would determine negative real interest rates and thus deleveraging) I do not thing we will have any effective monetary stimulus.

    1. Well, I am counting on it. I am working on a piece on myths in the economy. The latest one is: long periods of loose money and increasing fiscal deficits are not inflationary.

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