The European Debt Crisis: a succession of bad ideas

I recently gave a talk about the European debt crises. I focussed on the many policy blunders committed so far, as well as on the many that are still occupying the agenda. Here was my list:

Bad idea #1: You can run a monetary union and have a single currency and central bank without:

1. Fiscal backing for your central bank

2. European-wide banking regulation and deposit insurance

3. A European-wide safe asset

Bad idea #2: In the midst of a run on your debt (currency), words that are not not backed by actions, and hard cash, are enough.

Bad idea #3: To recapitalize banks you should, above all, avoid coming in with public capital. Rather, set targets for capital ratios and give banks enough time to reach those targets.

Bad idea #4: To a public debt crisis, respond with tighter fiscal discipline rules and tougher penalties even if you don’t have:

1. Anything like a wide agreement, either political, popular or intellectual.

2. Overseeing institutions in place.

3. Healthy banks not in need of a fiscal rescue.

Bad idea #5: Issuing large-scale Eurobonds without having:

1. The institutions in the previous point

2. Some joint taxation power

Bad idea #6: All countries should strive to have current account surpluses, now and always. Do not give in to the temptation to run irresponsible imbalances.

Bad idea #7: Two, seemingly opposed, but equally bad ideas:

One side: the European Central Bank can/should monetize the debt.

Other side: the European Central Bank should do nothing. It should not admit to even the possibility of higher future inflation. It should not buy sovereign debt of countries in trouble right now.