In the wake of the Euro Zone crisis, the following write-up presents some of the experts' suggestion on dealing with the crisis.
Dante Roscini, a faculty at the Harvard Business School, believes that weaker euro economies have to necessarily undergo a painful deflationary phase in the short-term in pursuit of ameliorating the major Euro crisis in the long run.
He cites the lack of fiscal solidarity, fiscal discipline, and the absence of lender of the last resort as the major reasons for the same. An important policy-reason for a tighter fiscal integration is that the euro currency cannot be devalued, as per the current monetary union terms of amalgamation.
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Paul De Grauwe, faculty at the London School of Economics proposes a hypothetical new lender of a last resort — an institution that would be willing to guarantee the bondholders the value of bonds in cash.
The reason for “new” such institution is that the ECB has discontinued performing the lender of last resort function. He opines that ECB, unlike other private banks, should be willing to incur losses occasionally in pursuit of ensuring financial stability. This process would ensure liquidity in the financial system, which is the need of the hour.
Final verdict : Stimulate the economy by re-instating the lender of the last resort function of ECB, and expand credit
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Jean Pisani-Ferry, a French economist (and public policy expert) opines that reviving the Euro Zone would entail one of the following: A broader mandate for the ECB, building of a banking federation, or fiscal union with common bonds — all three measures in pursuit of consolidating the looming Euro debts.
Acknowledging the difficulty in implementing each of these, and assessing the pros and cons, he argues that fiscal union could well be the game changer. Despite major political obstacles, if this move could be instated, it would improve market's perception of the Euro and the Euro economies. This, in turn, would re-stabilise the currency and the Euro economies.
Final verdict : Introduce a limited, experiment-based fiscal union that unifies fiscal policies of Euro nations.
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Italian economists, David Carfi and Daniele Schiliro, offer a game-theoretic solution on how to solve the Euro crisis. They utilise the sequential contagion of the crisis and differences in economic performances among various Euro members as inputs in their model.
The dominant strategy in their model (which is a non zero-sum game) offers the following two suggestions. First, Greece needs to consolidate its government expenditure. Second, Germany should re-balance its trade surplus with Greece.
Adapting the two strategies would eventually lead to a positive contagion effect on the whole Euro Zone area.
Final verdict : Fiscal consolidation by Greece, and re-balancing Germany's trade account with Greece.