Only two options left for the euro zone

As expected european politicians got themselves in a tight corner (very bad Nash equilibrium). The only ways out are now: break up or ECB becomes lender of last resort. Recent history shows that politicians will manage to convince ECB to accept the lender of last resort function. It does not mean that it is the good choice, it only means that the break-up issue will be pushed few years into the future.


6 thoughts on “Only two options left for the euro zone

  1. Not only does the ECB have to accept and take on the role of lender of last resort, but it also has to be more tolerant of inflation (Krugman said also 🙂 )

    1. About inflation, they just have to differentiate between the nature of the shocks. Also, they should take into account economic conditions. In recession the supply shocks to prices rarely see themselves later in public’s expectations and thus have a higher probability of just being transistor shocks. Inflation Targeting is not an exact science, it is more like an art. 🙂

  2. Not so sure that I agree with you, here. All countries have a lender of last resort (that can of course remain independent). The EMU exception is NOT having it…
    Borrowing in a foreign currency is simply not feasible. Then, we could discuss whether the EMU was desirable in the first place! But once you decide to make it, you may as well make it right.

    Will read you again!

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