I don't like to say this, but the only logical solution is the one put forward (half-heartedly) by Sarkozy: let the ECB be the European FED, a proper central bank with full powers at European level, so that debt can be underwritten by Europe as a whole. The collective credibility of Europe as a huge market and productive force is unquestionable, so this would stop speculative moves and stabilize the system.

Unfortunately, Germany is currently led by a chancellor who thinks she's running a Bavarian village, and would rather try to save her cows into a "safe barn" than to stop the avalanche from getting into the valley in the first place. This makes it easy for US and UK media to fuel doubt in the Euro, indirectly boosting their own currencies and helping themselves to artificially-low borrowing rates.

And I say that as a UK citizen who will eventually benefit from this state of things (through increased public investment, or rather less ferocious cuts by the bunch of aristos currently running the show over here).

She's certainly not taking the easy route, but it's the right route nonetheless.

It's all posturing. We will be back to this in 10 or 15 years regardless of any "rule" imposed now by Germany, unless we switch to superpower-mode and let the ECB play on the same level with the Yankees and the Chinese. The current agreement takes powers from individual banks but then it doesn't give them to a new subject; a huge macroeconomic power is kept hostage to the lie that the EU is not a unified body when, for all intents and purposes, it will have to be if it wants to survive.

Otherwise we might as well go back to our little villages and watch them being crushed one after the other. Merkel might keep enjoying her cows a couple of years more than the others, full of her righteous fiscal discipline, and eventually she'll be bought off by the Chinese like everyone else.

You seem to have a bone to pick with Germany and France (and I assume with all the original 6 EEC members) , but the fact of the matter is that they (some more than others coughItaly,Belgiumcough) at least managed to grow slow enough to make things not quite as unsustainable, unlike the more recent members who saw the advantages that the EEC member got out of the union but who weren't, let's be honest here, politically and economically mature enough to be in the same league as the others. It's not about 'oh but they did it as well!' - some could afford it, others couldn't, and shouldn't have. And it's their responsibility, and all this whining and blaming others now just shows their immaturity and unwillingness to take the sour with the sweet. (i.e., when my neighbor makes more money than I do and buys a BMW, and I buy one too and it's repo'd because I can't afford it, do I have a valid defense in saying 'oh but he bought one too?' Of course not).

(btw, I'm not sure how you can call 'fiscal discipline' 'righteous'. It gives off the impression that you have no rational understanding of the situation and just 'feel' that things should be in one way or another, completely disregarding objective reality.)

The biggest problem of Europe is probably that it's unfinished. Now, its institutions should be completed quickly to prevent further degradation of the situation on the markets (or, let's hope an improvement) but that's going to be very difficult.

I'm also concerned that, because of the current situation, the UK will never be willing stand at the core of Europe. And in my opinion, it's very much needed.

Thank you, but no thank you.

No wait, that was NATO...

The US also has considerably more breathing room to pay it off via taxation if they chose to. A country like Italy, where the government already takes 43% of GDP in taxes, has much less scope to plug any budget gaps by raising taxes than the US, which only takes 27% of GDP in taxes (across all levels).

(Practical Extraction and Reporting Language, btw)

Yes. The picture is even more stark when you look at Japan, where the government has more than 200% debt/GDP, but pays record low interest on bonds. Monetary sovereignty matters.

However, I wouldn't use the term "print money", simply because it clouds the issue. After all, you can also look at it this way: all the US government debt is money that has already been "printed". That view is essentially equivalent, because "paying back" a bond simply means transforming one government liability (the bond) into another government liability (reserves at the central bank). Whether that money is held in the form of paper, reserves at the central bank, or longer maturity bonds is unimportant.

What is important is that the private sector has already made it very clear that it does not intend to spend that huge amount of money any time soon, so for the purpose of analyzing what is actually happening in the economy the debt is irrelevant. After all, the debt is a stock, and what we're mostly interested in - things like GDP, or the payments that go towards employment - are flows.

Yes, there are interest payments. It is sobering to learn that a monetarily sovereign government chooses the interest rate that it pays on its liabilities. If the political will was there, the US government could just stop issuing interest-bearing bonds, and otherwise continue as usual.

Inflation, you worry? Well, the only first-order effect of such a move would be that the interest rate falls to zero. In theory, that could have a (very small) inflationary effect, but since the interest rate is already essentially zero, even that is unlikely to happen.

Well, sorta. A big reason Japan has such great rates on bonds is that they mostly sell them to Japanese people and institutions, and there's some weird nationalistic stuff going on there...

The trouble Europe has is that a number of member states are drowning in debt. Their debt greatly exceeds GDP and it is getting worse.. for a country like Italy this is recoverable as long as the markets believe they can pay it back! As soon as the markets stop believing their debt interest will stay above 7%, they will unable to maintain their debt and will probably go under as they are too big to bail out.

This is where UK and the US differ. There is a strong belief in the markets that they can pay their debt back just fine. The interest on their debt is about 2% and everything is manageable.

At least this is how I understand it.

If you look at the world banks doing business report + transparency internationals corruption report you get: - Iceland: Rank 9 / 13 - Ireland: Rank 10 / 19 - Italy: Rank 87 / 69 - Greece: Rank 100 / 80

No wonder that Ireland+Iceland are doing better, growing again. Even if you forgave Greece+Italy their entire debt, gave them their own currency back etc... I would bet in 20-30 years they would be in the exact same situation as now! I studied in Italy for 2 semesters and I love the country but every time I had to deal with the public bureaucracy I wanted to blow my brains out... I don't know how anyone could run a business in Italy and it is really astonishing how many great companies there are, which shows that a large part of the population has a very good education and work ethic...

The theory goes that a country like US/UK/Japan/etc always has the capability of paying their $/£/¥/etc debts (modulo political idiocy like the US debt ceiling standoff). Of course it might be painful from an inflation standpoint, but that would always be better than a default. Therefore the interest-rate relates to the risk of inflation making the repayment less valuable, not the risk of a literal default.

Since individual eurozone members don't have that privilege, their interest rates are high leading to a potential death spiral (risk of non-payment -> rates go higher -> debt more expensive -> risk is now higher) The theory behind the "eurobond" solution is that since the ECB can print euros it would remove the default risk so in theory interest rates would be limited to inflation risk.

You make a good point about the business climate numbers though. I don't see how a guaranteed-in-common Eurobond is ever going to fly with economies like Greece in the mix. Italy probably has some hope of reform if they want it badly enough, but it would be a big step for them.

However Greece is a totally different graph, it seems that the Euro gave access to cheap credit for the first time and they took as much as they could get. Or some of the former numbers are fake, who knows.

I guess there are two problems: 1) Current interest rates are unsustainably high 2) Unsustainable public policies... Eurobonds would probably solve 1) but increase the danger that 2) doesn't get addressed.

But the interesting thing is (and it was before my time so I'm taking my parents word for it) most of it was created because of the assumption people will cheat on their taxes if they can, so they added a lot of paperwork and 'silly' taxes to make up for it. Most is unneeded now but remains. Most stores are forced to use certified software they can't tamper with. A lot of purchases are done using credit/debit card so they can't be 'forgotten' in the tax forms, but because there is still the mentality of 'business owner' = 'tax evader/thief' a lot of this bureaucracy remains.

I have two examples that for me are just absurd, but if you start a company, even before you start developing a product or whatever you do, even if you don't take a salary or hire anyone, you are forced to pay social security (about 150 euros) and a chartered accountant per month (about 100 euros) before even having any income on the company. This was introduced so business owners couldn't just try and declare no 'profit' and avoid taxes, but now, it cripples a lot of small business just trying to start or hold on.

This is largely by choice. The UK government is on the forefront of the austerity crowd. They cut spending and fire people. Is it any surprise that GDP (which is basically the sum of all spending) is on a disappointing trajectory?

In a way, the UK government is doing economics a huge favor by acting as a laboratory that implements unneeded austerity.

The proponents of austerity predicted an upswing of activity as a result. I would say their theory has been proven wrong by now.

The Economist has a pretty good article this week looking at just this: http://www.economist.com/node/21541021 - I'm not sure if the full text is available to non-subscribers. Their opinion seems to be that the austerity plan was basically right, but it could now be loosened a little to encourage growth.

Left untackled, the budget deficit, which at 11.2% of GDP in 2009-10 was larger than those of almost all other rich countries, would soon have undermined confidence in the government’s ability to service its public debt.

This is the crucial flaw in the article's argument. The UK government is monetarily sovereign, and therefore always able to service its debt. That pretty much destroys the article's argument in favor of austerity.

Note that, unlike economists, most bond traders seem to actually understand the importance of monetary sovereignty. This is why you now hear talks about Germany's debt possibly being downgraded, but nothing about the UK or Japan, and not any more about the US (where the only thing that was ever in question was the government's willingness to pay, not its ability).

This is almost true technically, but not true how it matters. In order to service "unserviceable" debt, they need to cause inflation. Expected inflation gets priced in to bond yields, and inflating your way out debt ends up being not very useful if you will then need to go back to the money markets at some point in the future.

But actually, your central point is also not quite true: the UK government is NOT monetarily sovereign - in theory anyway - because it's the BOE who sets the money supply in practice. And it's for this reason that they have an inflationary target. Can the government intervene? Almost certainly. Will this further fuck market confidence and drive up bond yields? Yes. Do you get to a point where no-one will buy government bonds in GBP rather than USD? Absolutely.

The reason is that the debt loads are different. For the US it's actually NOT unmanageable. It's a lot, but it's fully manageable if people and the government take the right steps to keep it in check.

Take a look at the graphs here: http://www.theatlantic.com/business/archive/2011/11/reasons-...

Europe has much higher bank debt, overall higher government spending to GDP ratios (keep in mind in many cases this is with a lower overall GDP as well), and in a few cases higher debt to GDP levels. Europe has a handful of critical financial problems: shaky, heavily indebted banks; a massive debt burden; very little room to increase government spending; and an inability to actually regulate key aspects of the Eurozone economy (due to flaws in the nature of the laws backing the Euro). The EU in general is incapable of pulling even a hail mary bank bailout to stall for time. Add on top of this an even larger burden of state services (socialized medicine, pensions & retirement, welfare, etc.) that European politicians will have trouble downsizing to try to pay off the debt.

The US has a massive defense budget it could, in theory, trim substantially to bring the deficit under control, especially in concert with slightly reduced spending across the board and slightly increased taxes. The EU doesn't even have that option though, it's coming down to the wire and very little short of a miracle can save them.

Edit: note that the issue isn't paying down debt in the next few years, that's a fantasy for most of the world. The issue is keeping things together for the next few years to allow for long term effects like economic growth and inflation to really take care of the problem. For some parts of the EU there doesn't seem to be a way to make that happen. It won't be the worst thing in the world if some countries default on their debts (it'll probably be a footnote compared to other events of the last 3 decades), but it won't be a picnic either.