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In an ideal world it is clearly not the task of a central bank to finance regional current-account imbalances. But it would still be preferable for the ECB to provide the Italian banking system with continuing access to its normal monetary policy operations to the tune of 50 billion annually, rather than buying hundreds of billions worth of government debt. (See my CEPS commentary on why the ECB has no choice but to effectively become the `central counterparty' given that the Eurozone is not a fiscal union.)
Anyway, Gros' solution is this:
The distribution of tasks should be simple:
Italian households should finance their own government by buying its debt, and
The ECB should prevent a collapse of the Italian banking system.
A first, key element of survival is thus that the new high-cost debt should be sold mostly to Italians. In this way the higher cost of debt service will not be a burden on the country, but just a redistribution of income between savers and taxpayers.
And that cannot possibly lead to a collapse in aggregate demand, now can it? Because that would mean people saving without specific plans to spend later. And that is basically like saying that people can't predict the future.
Must be a miserable world where you don't even know next weeks weather. Probably round too.
No word of the fact that Germany has an excess of savings over investment, and a government which intends to reduce the amount of debt it issues, so that German savings must be recycled into foreign assets. Gros is suggesting Italian debt should be held by domestic investors in a proportion of about 3/4, rather than the current 1/2. But then you'd have to prevent German and Italian savers from investing freely in each other's debt markets (Italians cannot buy "safe" German bonds, Germans cannot buy "high-yield" Italian bonds). That is, curtail the free movement of capital in the single currency area.
tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
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