Here are some of my thoughts on the European Debt Crisis (mostly a narrative, I like stories...). I'm not a monetary expert and I'm even less knowledgeable about politics in the EU, so please feel free to point out my mistakes and misconceptions.
Rather than being particular to the mortgage back securities written on real estates in the Florida keys, investment bubbles were occurring all over the world. For instance, the London real estate blew up to epic proportions, McMansions popped up not only in Californian suburbs, but also in Greece, Spain, etc., and finally I started gold plating my Delorean for that extra bling (oops wrong post)... Regardless of the excesses of the Bush era global finance, the recession that followed significantly depressed the EU economies from 2008 onward. See
The spiralling depression of GDP implied a significant drop in government revenue for all of these nations. Even countries like Spain and Portugal, that kept budget surpluses during the good years, had to resort to short term borrowing to make ends meet. This by itself would not have led to the current debt crisis. For instance, while Japan has significant public debt at a whopping 220% of its gdp compared to Greece's 142% (see, wiki), its short-term yields (the interest charged on their debt) are as low as they have ever been (see, bloomberg). The main difference between the Euro-zone nations and the rest of the western world is that the Euro-zone countries handcuffed themselves in terms of monetary policy.
What has happened is that there is a bank run on EU sovereign debt. Countries roll over their short term debt as a matter of practice. The issuance of these debts are for all practical matters pegged to their off the run yields. So if investors are afraid that a sovereign (say Italy) may default, the interest rate on their short term loans would rise, which makes it even costlier for the sovereign to issue new funds, which in turn makes default so much more likely. If a country had monetary autonomy, the monetary authority could simply say they'll print out enough money so that government will never default. The simple issuance of this threat defeats any potential for default, which would in turn decrease the cost of borrowing.
Take the fact that there had been an investment bubble both in the states and in europe. The reason that there isn't a run on the US debt (despite the downgrading of its ratings) is precisely because it has monetary autonomy. The fed tripled the monetary supply since the financial meltdown of 2008. There was no doubt that if push comes to shove, the fed would become the lender of last resort to finance the US treasury debts. This however, is not true of the ECB. In my opinion, the heart of the matter is that the ECB has promised exactly NOT to be the bank of last resort. (Although something to this effect is written into its constitution, most other observers seem to suggest flexibility in terms of the legalities). Without a lender of last resort, any state that requires short term borrowing risks the possibility of a debt run.
Take the fact that there had been an investment bubble both in the states and in europe. The reason that there isn't a run on the US debt (despite the downgrading of its ratings) is precisely because it has monetary autonomy. The fed tripled the monetary supply since the financial meltdown of 2008. There was no doubt that if push comes to shove, the fed would become the lender of last resort to finance the US treasury debts. This however, is not true of the ECB. In my opinion, the heart of the matter is that the ECB has promised exactly NOT to be the bank of last resort. (Although something to this effect is written into its constitution, most other observers seem to suggest flexibility in terms of the legalities). Without a lender of last resort, any state that requires short term borrowing risks the possibility of a debt run.
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