14 May 2012

It's Crunch time for Europe : Hollande must stand firm

It's clear that we are reaching a turning point in world affairs. François Hollande, the newly elected French president will be meeting with Angela Merkel as soon as he is sworn in tomorrow. He will be carrying the hopes of many across Europe.

For me, he should be insisting that the current plan, based on enforced austerity, does not have a chance in hell of succeeding. You only have to look at the ridiculous fluctuations in the lending rates being proposed by the money markets to realize that there is simply no way that any government can plan an exit route when they are at the mercy of the "invisible hand" of the markets.

People talk about Greece quitting the Euro as being an option. I think that is obvious nonsense. Greece owes money in Euros. Changing to drachmas will just mean that the interest payments will be even more random. Who will accept to be paid off in drachmas? They will be forced to buy Euros just to pay the interest charges, and the debt level will go even higher.

The amazing fact is that there is a solution. It's the one that I have been proposing for months, and the one that I have made clear in my Youtube presentation "Solving the Debt Crisis". It really is simple, and simply requires that Central banks, and especially the European Central Bank, be forced to lend governments enough money so that they can pay off their entire national debt. In the case of Greece, this would require at most €355 billion (and that is without taking into account the "hair-cuts" that have been imposed on private lenders). That number is only one third of the amount of money that Mario Draghi has printed for the commercial banks since taking over as head of the ECB last november.

The ECB has all the resources it needs - it doesn't need the German government to lend it money because it can print its own.

Critically, the two "reasons" typically advanced for blocking ECB lending to governments are demonstrably bogus. First, the argument that it would risk causing inflation is plain wrong, because if the money is only used to pay off debt, the "money" disappears into thin air. Second, the claim that central bank lending to governments is blocked by the Lisbon Treaty is also untrue, since paragraph 2 of article 123 specifically allows central bank lending to "publicly-owned credit institutions", which can in turn lend to governments.

What possible argument could Angela Merkel produce to block such a suggestion? I honestly can't think of anything valid. She surely wouldn't dare to suggest that it was important to protect the monopoly on money creation that is currently enjoyed by commercial banks? Nor could she reasonably argue that it was a good thing that Germany's borrowing rates are several times lower than for most eurozone governments.

No. I think that François Hollande definitely has an excellent hand to play. Hey, maybe he has even read my blog!


  1. No. I think that François Hollande definitely has an excellent hand to play. Hey, maybe he has even read my blog! Please, please do your utmost to see he gets a copy of all you have written in these past few months. It's the most sense I've seen anywhere.

  2. Caro Thorpe, la sua idea è valida. Ma non esaustiva per vincere l'attuale crisi economica.Se la interessa la può trovarla sul mio blog www.econ-agan.blogspot.com