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You talk symbolic brain, Varoufakis talks Semiotics versus hard facts
During the first part of 2010, culminating in the May `bail out' for Greece, Europe decided: (a) to remain in denial about the poor health of its banking sector, (b) to treat Greece's insolvency as a liquidity crisis and (c) to prescribe austerity measures that deepened and widened the ensuing debt crisis.

Since then developments have made it abundantly clear that this is a course to nowhere. Predictably, the Greek crisis got worse not because the medicine was badly, or insufficiently, applied but because (a) it was toxic and (b) it had awful side-effects on Europe's ailing banking sector.


The time to stop dithering has come. First, Europe needs to recapitalise its banks. Secondly, it needs to unify the Maastricht-compliant part of eurozone's debt (through the introduction of a homogenous eurobond). Finally, we need a new pan-European investment spree (via the European Investment Bank). Then and only then will the `Greek' problem be reduced to an order of magnitude in concert with my country's actual size.

This is an english version of an article in Die Zeit published yesterday in German. A month ago, Varoufakis had published Article in Die Zeit, promoting the Modest Proposal
Is there an alternative? Absolutely! Consider the following three-step policy that attacks all manifestations of the crisis head on:

1. Use the funds raised by the European Financial Stability Mechanism (EFSF) to recapitalise the eurozone's (almost insolvent) banks in exchange for shares in these banks. Once the banks are cleansed, they will no longer need to rely on massive liquidity injections from the ECB (and can even be asked to take a selective haircut on bonds from the periphery). The EFSF then sells the shares and recoups its funds, thus costing the German taxpayer nothing (much like the TARP scheme in the USA).

2. A conversion loan is organised by the ECB for the part of the debts of member-states which does not exceed the EU's Maastricht limits (60% of GDP). In brief, the ECB takes on its books forthwith a tranche of the sovereign debt (of all member states that request it) equal in face value up to (the Maastricht-compliant) 60% of GDP and finances this by issuing eurobonds that are its own liability. Naturally, the member-states continue to service their debts (to the ECB now) but at the lower rates (and with the longer maturity) secured by the eurobond issue.

3. Empower the European Investment Bank (EIB) to fund a large scale investment program by which permanently to counter the forces of recession in peripheries that keep dragging the rest of the currency union (including parts of German society) toward stagnation. How can this happen? By allowing for the 50% of project funding (which now the bankrupt member-states must raise!) to come from the ECB's net eurobond issues.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 07:22:24 AM EST

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