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Daniel Gros: Can Italy survive the financial storm? (VoxEU)
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.)
Get that, Herr Stark? We don't live in an ideal world.

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.
If you can't tax savings through inflation, try to lure them into buying your debt.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 19th, 2011 at 05:59:32 AM EST
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