How to Save the Euro

[...]when the housing bubble burst on both sides of the Atlantic in 2008, the private sector of almost every country-both inside and outside the eurozone-rushed to deleverage, saving far more than 3 percent of GDP even after central banks had lowered interest rates to zero or even negative levels. I...

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Bibliographic Details
Published in:The International economy 2020-01, Vol.34 (1), p.34-56
Main Author: Koo, Richard C
Format: Magazinearticle
Language:English
Subjects:
Bond issues
Budget deficits
Central banks
Economic conditions
Eurozone
Expenditures
Fiscal policy
GDP
Government
Government bonds
Gross Domestic Product
Institutional investments
Interest rates
Monetary policy
Private sector
Recessions
Sovereignty
Voters
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Summary:[...]when the housing bubble burst on both sides of the Atlantic in 2008, the private sector of almost every country-both inside and outside the eurozone-rushed to deleverage, saving far more than 3 percent of GDP even after central banks had lowered interest rates to zero or even negative levels. In a non-euro country, pension funds and other institutional investors who are unable to take on substantial foreign exchange risk or put all their money in equities are drawn to government bonds because they are the safest fixed-income asset denominated in the home currency. If member countries cannot even utilize the (recession-inducing) excess savings of their own private sectors to fight an economic downturn, voters will feel they are not in control of their economic destiny and will lose confidence in democratic structures. FISCAL DIS-UNION WILL ALSO NORMALIZE MONETARY POLICY This proposal would also provide a big relief to the European Central Bank, which was forced to carry out quantitative easing, negative interest rates, and other unconventional monetary policies precisely because the two-tier problem prevented member governments from providing the fiscal support their economies so badly needed.
ISSN:0898-4336