A plan to fix a broken Europe

SO really how bad and broken is Europe?

The eurozone has a GDP of about €11 trillion. Its debt to GDP ratio is about 85%. This leaves a debt pile of €9.35tn. & Some countries like Greece, Italy, Spain and Ireland find this level of debt unsustainable.

The question we have to ask is how much would be needed to achieve a debt level that is sustainable for those countries that are feeling the pressure. Europe needs to send a clear and bold message to the markets, and a meaningful cut in the above ratio would be a clear signal. By how much and by what methods can we achieve this?

A good idea is to fix it to something tangible, something that has been previously agreed by everyone. Something like the levels agreed by the Maastrict Treaty. The countries that signed up to this treaty agreed that the maximum level of debt to GDP should be no more than 60%.

A quick calculation using this as a guide would give a new eurozone debt of €6.6tn. When subtracted from the current amount it leaves a difference of €2.75tn. Now the question arises: how to “de-leverage” to 60%. The first problem is that in some countries it’s more than 60% and in some less than 60%, so to get agreement of everyone will be nearly impossible.

Clearly the only way we can achieve the most agreement is for the ECB to engage in quantitative easing.

There are two ways to do this. The first is by physically printing the cash. The second, which would be best, and which I have been posting to various message boards for the last three months, is that the ECB do this by directly injecting capital into European banks, or into European central banks, and they can distribute the funds to their own banks. There is no printing necessary as it all can be done electrically.

When this task is completed, we will have a debt to GDP ratio of 60%. We also will have banks recapitalised by €2.75tn. This should easily save any banks with liquidity problems. It also will lead to the emerging of banks who now have the required funds to resume lending, and act like a bank should. True, we will have an extra €2.75tn created and the Germans and Finns, etc, could freak out over risks of inflation.

But the advantage of this course of action is that the only way this money will enter the system and into consumers’ pockets is by the issuing of new loans and mortgages, etc.

John Tierney

Tuam

Co Galway