Arnold Kling  

Comments on Eurozone Solutions

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Tyler Cowen writes,


When it comes to debt, the periphery countries simply don't want to pay up. Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece. It's amazing how many people won't come out and utter or recognize this simple truth.

He is arguing from the German point of view. I would add that Germans should give a Don Boudreaux response to the complaints that Germany has benefited unfairly from its membership in the euro due to its ability to rack up trade surpluses at a fixed exchange rate. Boudreaux would say that a trade surplus is a boon to other countries, not a theft from them. Who gets to consume more, after all?

Anyway, it is interesting that one solution is simply to have the debtor countries sell assets to pay up. As someone once said, "They hired the money, didn't they?"

Incidentally, at this dinner, Richard Miniter suggested that the U.S. government has a lot of land in its possession that it could sell in order to pay off our debt.

One solution I keep hearing is that the Eurozone needs a tighter fiscal union. I hear that as a transfer of power away from democratic governments and toward eurocrats, so that my inclination is to be opposed. Incidentally, the analogy with the U.S. transition from the Articles to Confederation to the Constitution is not quite the trump card that some folks think. There are libertarians who view that transition as a step backwards.

I keep coming back to my analogy of the banks and the governments as two drunks trying to prop each other up. The governments are allowed to run unsustainable budgets because the banks are willing to lend to them. The banks are willing to lend to them because they expect to be bailed out if anything goes wrong. After all, the capital regulations tell the banks that it is ok to treat sovereign debt as risk free, so don't the regulators have an obligation to bail out banks that follow the regulations?

The solution that I want to see is one which does not perpetuate the two-drunks syndrome. That might mean that both drunks have to suffer. The governments will lose access to credit, and the banks will go through bankruptcy.



COMMENTS (6 to date)
fundamentalist writes:
I keep coming back to my analogy of the banks and the governments as two drunks trying to prop each other up.

Exactly! Great analogy!

Mark V Anderson writes:

I like the idea of countries like Greece or Italy selling assets to solve their debt crisis. But my question is whether these countries have enough assets available to make a difference.

The comparison of all the land the U.S. holds is a good example. Sure the U.S. could get a lot of money from its land, which would help take care of its massive deficit. But this is in no way a short term solution. I doubt the U.S. would obtain much cash if they had to sell the land at fire sale prices. I wonder if any assets that Greece or Italy have are available to be sold within a few months at reasonable prices?

Maybe they could mortgage these assets, which would be much stronger debt than the current uncollateralized debt these countries have now?

GlibFighter writes:

"There are libertarians who view that transition as a step backwards." Yes, and there are libertarians who think Jefferson Davis and his colleagues fought for a just cause. Some of those same libertarians also are under the impression that Ron Paul has a rational take on monetary policy.

R Pointer writes:

Re: Selling assets to repay loans.

If these countries have a hard time making good on contractual obligations to repay sovereign debt, why would selling state assets whose ownership rights have to be enforced by the very states that cannot make good on their own debts be a viable solution? What is to stop them from renationalizing those assets after some period of time?

I am certain some nationalistic sediments could arouse expropriation of those assets at some point. And prey tell how would these countries decide what assets are up for sale and which aren't? The United States could sell Capitol Hill or the White House but we choose not to. The same goes for the Colosseum or the Acropolis. Negotiated with States isn't like negotiating with other types of actors.

Snorri Godhi writes:

I second Fundamentalist: the 2-drunk analogy is spot on; while ...

"[...] the analogy with the U.S. transition from the Articles to Confederation to the Constitution is not quite the trump card that some folks think."

In fact, for anti-Americans, or generally for people who favor the EU model over the US model, this analogy should be a good argument against fiscal union.

"There are libertarians who view that transition as a step backwards."

Such libertarians, unlike me, are not realists: with Britain, France, and Spain still holding colonies in mainland North America, the Confederation would probably not have survived for long.

It is true that the Federation put the US on the slippery slope to the New Deal, but it has taken a long time to even begin slipping.

Badger writes:

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