Leaders must show vision: take a bold political step and grant massive, but conditional, loans that eliminate the risk of sovereign defaults once economic policies are agreed by Eurogroup. Spirits will rise, yields will fall, banks can lend, consumers consume and industrialists invest.
The EU’s bank stress tests have proved one thing beyond all reasonable doubt: on the central scenario, the EU’s banks are in good shape. Even on the “adverse” scenario, the general problems appear quite manageable – until the rampant fears about sovereign defaults are factored in. This is no longer a banking crisis – it is blindingly obvious that there is a full-scale confidence crisis in the debts of some sovereign states who are also the implied guarantors of their banks. If the state is not in trouble, neither are the banks headquartered there. Conversely, if the banks are required to deal with the default of their government (often their largest debtor), then a downward spiral in economic activity is inevitable and imminent.
At the low point of the 1930’s US depression, Roosevelt said: "the only thing we have to fear is fear itself". The eurozone does not have to fall to such a low. At this vital moment, its leaders must show the same visionary capacity as Roosevelt: take a bold political step and grant massive, but conditional, loans that eliminate the risk of sovereign defaults for those states that have already had their economic policies scrutinised and agreed by the Eurogroup. Spirits will rise, yields will fall, banks can lend, consumers consume and industrialists invest. (See 7-point plan to restore confidence in the eurozone.)
Recent Graham Bishop papers on this subject:
- Either political union of the eurozone OR disaster is at hand: A 7-point plan, 11 July 2011. View
- Graham Bishop: Three Proposals to ensure Fiscal Sustainability in the Eurozone, 27 January 2011. View
- Graham Bishop's book: 'The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?', 20 January 2011.
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