May 15, 2012
A Washington Post article on the crisis in Greece and its potential impact on Europe’s economy told readers that:
“growth in China slowing and U.S. officials looking to tame record government deficits …..[is] leaving Europe, in a sense, operating without a safety net.”
Actually, Europe has a perfectly good safety net. It is called the European Central Bank (ECB). The ECB, if it chose to act like a central bank, could guarantee the debt of Italy, Spain and other heavily indebted countries. This would quickly reduce the interest rate on their debt to near German levels, making their debt burden easily sustainable.
To date, the ECB has maintained its obsession with keeping inflation at less than 2.0 percent, which prevents the sort of adjustment that would allow Greece, Italy and Spain to become competitive within the euro zone. The article should have mentioned the ECB’s obsession with maintaining this Maginot Line, which is at the center of the euro zone crisis.
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