My lecture at Columbia University on the euro crisis

As the followers of my blog would know I recently did a 11 day speaking tour in the US. I want to share a bit of that with my readers.

Here you can watch my lecture at Columbia University on the euro crisis.

And this is the Powerpoint presentation from the lecture.

I want to thank my big hero Adam Tooze who is head of the Europe Institute of Columbia University for the invitation to speak at Columbia.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

Horror graph of the week – Greek PMI collapses

If you ever read Friedman and Schwartz’s “A Monetary History of the United States” you know what happens when a central bank fails to act as a lender-of-last resort in the event of a bank run and/or at the same time fails to offset the impact on broad money growth of such bank run.

It of course happened in the US in 1930-31 and again in Europe after the collapse of Credit-Anstalt in Austria also in 1931. In both cases the result was a deep depression. Now it has happened again in Greece, but Greece is already in a deep economic depression.

Just have a look at this shocking graph from

Greek PMI

There is no great reason to trust eyeball-econometrics, but judging from the sharp drop in Greek July PMI (released today) then we should expect another 10-15% drop in Greek real GDP in the next couple of quarters. That would mean that we soon will have seen Greek real GDP being halved since the start of this crisis.

I think it will be very hard to find any other example of a (peacetime) collapse of real GDP of this magnitude in any other country in the world in the past 200 years and there is nothing positive to say about this. It is the terrible consequence of massive policy failures in Brussels, Frankfurt, Berlin and Athens.

A truly Greek tragedy.

HT Joe Wiesenthal.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail:

Also note that I am on a Speaking Tour in the US in October. See more here.

A simple measure of European political instability – yes, Greece tops the ranking

The escalation of the greek crisis recently has made me think about the connection between the economic development, austerity and political uncertainty. Unfortunately we don’t have a commonly accepted measure of political uncertainty or political instability.

However, I got an idea to make a simple measure of political instability in Europe. My idea is simply to count the total number of Prime Ministers, Finance Ministers and central bank governors a given country have had in a given period. A high number would indicate a high level of political instability.

The graph below shows this measure for 30 European countries since January 2009.

political instability

I have not done any deep analysis of the data so I am cautious not to make any strong conclusions based on what I have so far.

However, there is a few things I would note:

1) Greece by has been by far the most politically unstable country among the 30 European countries during the Great Recession.

2) All other countries are essentially within one standard deviation of the mean ranking.

3) There is no major differences between the political stability of countries with floating exchange rates relative to euro countries (and peggers).

4) Spain, Portugal and Ireland alle have been surprisingly politically stable during the Great Recession. Among the PIIGS only Italy comes close to the kind of political instability we have seen in Greece.

5) It isn’t surprising that Great Britain, Luxembourg, Sweden and Germany are among the most politically stable countries in the Europe.

6) However, Poland and Turkey have been remarkably stable in political terms. This will likely be a surprise to most people. Given what is happening in Turkish politics and recently geopolitical and military events the ranking could certainly be questioned.

7) Denmark and Finland have been surprisingly unstable politically during the Great Recession.

Obviously this is a very simple measure of political instability and if one want to use the ranking more work on the index would be needed.

For example, it is obviously that we might be more interested in looking at the change in the index rather than on the level of the index. Furthermore, some countries are likely “structurally” more stable than other countries. Should we account for that in some way?

Finally I have not taken into account differences in electoral systems in different countries. That likely distort the data.

If you want to have a closer look at the data see the Political instability Ranking.

Any feedback is appreciated and I encourage my readers to play around with the data and develop it further.

PS I have left out Switzerland of the ranking due to the fact of the large institutional differences in the way Swiss democracy works compared to other place in Europe.

The Euro – A Fiscal Strangulation Mechanism (but mostly for monetary reasons)

In my earlier post The Euro – A Fatal Conceit I argued that had the euro not be introduced and had we instead had freely floating exchange rates then “European taxpayers would (not) have had to pour billions of euros into bailing out Southern European and Eastern European government”. Said in another way had we not had the euro then there would not have been a European “debt crisis” or at least it would have been significantly smaller.

A simple way of illustrating this is to have a look at the debt development in the euro countries (and the countries pegged to the euro) and comparing that with the debt development in the European countries with floating exchange rates.

I use the same countries as in my previous post – The Euro – A Monetary Strangulation Mechanism. 21 euro countries (and countries pegged to the euro) and 10 countries with more or less floating exchange rates.

The graph below shows the development in (median) gross public debt (% of GDP) in the two groups of countries. (All countries are hence equally weighted).

debt change 2007 20014 floaters peggers

The picture is very clear – while both the floaters and the euro countries saw their public debt ratios increase sharply on the back of the 2008 shock (albeit less extremely for the floaters than for the euro countries) – from 2011 there is a very clear difference in the debt development.

Hence, from 2011 the floaters have seen as seen a gradual decline in gross public debt (as share of GDP), while the euro countries (and the peggers) have seen a steep increase in public indebtedness.

So while the floaters have seen their public debt increase by just above 10% of GDP from 2007 to 2014 the euro countries have seen a rise in public debt of more than 25% of GDP!

The graph below shows the individual breakdown of the data.

Publ debt green red

Again the picture is very clear – the euro countries (and the euro peggers) have had significantly more negative debt dynamics than the European floaters. Even if we disregard the PIIGS countries then the euro countries are on average doing a lot worse than the floaters in terms of public debt dynamics .

The euro countries are trying harder, but are succeeding less

One could of course argue that the difference in debt development simply reflects that some countries are just less prudent than other. However, the graph below shows that this is not a very good explanation.

Fiscal tightening

The graph shows the annual change in the fiscal stance (measured as the annual change in IMF’s estimate for the structural public balance as share of GDP). Positive (negative) values are a fiscal easing (tightening).

A few interesting conclusions emerge. First of all overall both euro countries and floaters seem to have had rather pro-cyclical fiscal policies – hence, both groups of countries eased fiscal policy in the ‘good years’ (2005-2009), but tightened the fiscal stance in the ‘bad years’ (2010-14.)

Second, it is notable that the fiscal stance of the euro countries and the floaters is highly correlated and is of a similar magnitude.

So even if the fiscal stance has an impact on growth in both groups of countries it seems a bit far-fetched to in general attribute the difference in real GDP growth between the two groups of countries to difference in the fiscal stance. That said, it seems like overall the euro countries and peggers have had a slightly more austere fiscal stance than the floaters after 2010. (Some – like Greece of course have seen a massive tightening of fiscal policy.)

This of course makes it even more paradoxical that the euro countries have had a significantly more negative debt dynamics than the floaters.

It is not a debt crisis – it is an NGDP crisis  

So we can conclude that the reason that the euro countries’ debt dynamics are a lot worse than the floaters is not because of less fiscal austerity, but rather the problem seems to be one of lacking growth in the euro countries. The graph below illustrates that.

NGDP debt

The graph plots the debt dynamics against the growth of nominal GDP from 2007 to 2014 for all 31 countries (both euro countries and the floaters).

The graph clearly shows that the countries, which have seen a sharp drop in nominal GDP such as Ireland and Greece have also seen the steepest increasing the public debt ratios. In fact Greece is nearly exactly on the estimated regression line, which implies that Greece has done exactly as good or bad as would be expected given the steep drop in Greek NGDP. This leaves basically no room for a ‘fiscal irresponsibility’ explanation for the rise in Greek public debt after 2007.

This of course nearly follows by definition – as we define the debt ratio as nominal public debt divided by nominal GDP. So when the denominator (nominal GDP) drops it follows by definition that the (debt) ratio increases. Furthermore, we also know that public sector expenditure (such as unemployment benefits) and tax revenues tend to be rather sensitive to changes in nominal GDP growth.

As a consequence we can conclude that the so-called ‘Europe debt crisis’ really is not about lack of fiscal austerity, but rather a result of too little nominal GDP growth.

And who controls NGDP growth? Well, overall NGDP growth in the euro zone is essentially under the full control of the ECB (remember MV=PY). This means that too tight monetary policy will lead to too weak NGDP growth, which in turn will cause an increase in public debt ratios.

In that regard it is worth noticing that it is hardly a coincidence that the ECB’s two unfortunate rate hikes in 2011 also caused a sharp slowdown in NGDP growth in certain euro zone countries, which in turn caused a sharp rise in public debt ratios as the first graph of this post clearly shows.

Consequently it would not be totally incorrect to claim that Jean-Claude Trichet as ECB-chief in 2011 played a major role in dramatically escalating the European debt crisis.

Had he not hiked interest rates in 2011 and instead pursued a policy of quantitative easing to get NGDP growth back on track then it seems a lot less likely that we would have seen the sharp increase in public debt ratios we have seen since 2011.

Of course that is not the whole story as the ECB does only control overall euro zone NGDP growth, but not the NGDP growth of individual euro zone countries. Rather the relative NGDP growth performance within the euro is determined by other factors such as particularly the initial external imbalances (the current account situation) when the shocks hit in 2008 (Lehman Brothers’ collapse) and 2011 (Trichet’s hikes.)

Hence, if a country like Greece with a large current account deficit is hit by a “funding shock” as in 2008 and 2011 then the country will have to have an internal devaluation (lower prices and lower wage growth) and the only way to achieve that is essentially through a deep recession.

However, that is not the case for countries with a floating exchange rate as a floating exchange country with a large current account deficit does not have to go through a recession to restore competitiveness – it just has to see a depreciation of its currency as Turkey as seen since 2008-9.

Concluding, the negative debt dynamics in the euro zone since 2008 are essentially the result of two things. 1) The misguided rate hikes in 2011 and 2) the lack of ability for countries with large current account deficits to see a nominal exchange rate depreciation.

The Euro is Fiscal Strangulation Mechanism, but for monetary reasons 

We can therefore conclude that the euro indeed has been a Fiscal Strangulation Mechanism as fiscal austerity has not been enough to stabilize the overall debt dynamics in a numbers of euro zone countries.

However, this is only the case because the ECB has first of all failed to offset the fiscal austerity by maintaining nominal stability (hitting its own inflation target) and second because countries, which initially had large current account deficits like Greece and Spain have not – contrary to the floaters – been able to restore competitiveness (and domestic demand) through a depreciation of their currencies as they essentially are “pegged” within the euro zone.

PS I have excluded Croatia from the data set as it is unclear whether to describe the Croatian kuna as a dirty float or a dirty peg. Whether or not Croatia is included in the sample does not change the conclusions.

Update: My friend Nicolas Goetzmann pointed out the Trichet ECB also hiked interest rates in 2008 and hence dramatically misjudged the situation. I fully agree with that, but my point in this post is not necessarily to discuss that episode, but rather to discuss the fiscal implications of the ECB’s failures and the problem of the euro itself.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

The Euro – A Monetary Strangulation Mechanism

In my previous post I claimed that the ‘Greek crisis’ essentially is not about Greece, but rather that the crisis is a symptom of a bigger problem namely the euro itself.

Furthermore, I claimed that had it not been for the euro we would not have had to have massive bailouts of countries and we would not have been in a seven years of recession in the euro zone and unemployment would have been (much) lower if we had had floating exchange rates in across Europe instead of what we could call the Monetary Strangulation Mechanism (MSM).

It is of course impossible to say how the world would have looked had we had floating exchange rates instead of the MSM. However, luckily not all countries in Europe have joined the euro and the economic performance of these countries might give us a hint about how things could have been if we had never introduced the euro.

So I have looked at the growth performance of the euro countries as well as on the European countries, which have had floating (or quasi-floating) exchange rates to compare ‘peggers’ with ‘floaters’.

My sample is the euro countries and the countries with fixed exchange rates against the euro (Bulgaria and Denmark) and countries with floating exchange rates in the EU – the UK, Sweden, Poland, Hungary, the Czech Republic and Romania. Furthermore, I have included Switzerland as well as the EEA countriesNorway and Iceland (all with floating exchange rates). Finally I have included Greece’s neighbour Turkey, which also has a floating exchange rate.

In all 31 European countries – all very different. Some countries are political dysfunctional and struggling with corruption (for example Romania or Turkey), while others are normally seen as relatively efficient economies with well-functioning labour and product markets and strong external balance and sound public finances like Denmark, Finland and the Netherland.

Overall we can differentiate between two groups of countries – euro countries and euro peggers (the ‘red countries’) and the countries with more or less floating exchange rates (the ‘green countries’).

The graph below shows the growth performance for these two groups of European countries in the period from 2007 (the year prior to the crisis hit) to 2015.

floaters peggers RGDP20072015 A

The difference is striking – among the 21 euro countries (including the two euro peggers) nearly half (10) of the countries today have lower real GDP levels than in 2007, while all of the floaters today have higher real GDP levels than in 2007.

Even Iceland, which had a major banking collapse in 2008 and the always politically dysfunctionally and highly indebted Hungary (both with floating exchange rates) have outgrown the majority of euro countries (and euro peggers).

In fact these two countries – the two slowest growing floaters – have outgrown the Netherlands, Denmark and Finland – countries which are always seen as examples of reform-oriented countries with über prudent policies and strong external balances and healthy public finances.

If we look at a simple median of the growth rates of real GDP from 2007 until 2015 the floaters have significantly outgrown the euro countries by a factor of five (7.9% versus 1.5%). Even if we disregard the three fastest floaters (Turkey, Romania and Poland) the floaters still massively outperform the euro countries (6.5% versus 1.5%).

The crisis would have long been over had the euro not been introduced  

To me there can be no doubt – the massive growth outperformance for floaters relative to the euro countries is no coincidence. The euro has been a Monetary Strangulation Mechanism and had we not had the euro the crisis in Europe would likely long ago have been over. In fact the crisis is essentially over for most of the ‘floaters’.

We can debate why the euro has been such a growth killing machine – and I will look closer into that in coming posts – but there is no doubt that the crisis in Europe today has been caused by the euro itself rather than the mismanagement of individual economies.

PS I am not claiming the structural factors are not important and I do not claim that all of the floaters have had great monetary policies. The only thing I claim is the the main factor for the underperformance of the euro countries is the euro itself.

PPS one could argue that the German ‘D-mark’ is freely floating and all other euro countries essentially are pegged to the ‘D-mark’ and that this is the reason for Germany’s significant growth outperformance relative to most of the other euro countries.

Update: With this post I have tried to demonstrate that the euro does not allow nominal adjustments for individual euro countries and asymmetrical shocks therefore will have negative effects. I am not making an argument about the long-term growth outlook for individual euro countries and I am not arguing that the euro zone forever will be doomed to low growth. The focus is on how the euro area has coped with the 2008 shock and the the aftermath. However, some have asked how my graph would look if you go back to 2000. Tim Lee has done the work for me – and you will see it doesn’t make much of a difference to the overall results. See here.

Update II: The euro is not only a Monetary Strangulation Mechanism, but also a Fiscal Strangulation Mechanism.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

The Euro – A Fatal Conceit

Imagine that the euro had never been introduced and we instead had had freely floating European currencies and each country would have been free to choose their own monetary policy and fiscal policy.

Some countries would have been doing well; others would have been doing bad, but do you seriously think that we would had a crisis as deep as what we have seen over the past seven years in Europe?

Do you think Greek GDP would have dropped 30%?

Do you think Finland would have seen a bigger accumulated drop in GDP than during the Great Depression and during the banking crisis of 1990s?

Do you think that European taxpayers would have had to pour billions of euros into bailing out Southern European and Eastern European governments? And German and French banks! (I elaborate on this here.)

Do you think that Europe would have been as disunited as we are seeing it now?

Do you think we would have seen the kind of hostilities among European nations as we are seeing now?

Do you think we would have seen the rise of political parties like Golden Dawn and Syriza in Greece or Podemos in Spain?

Do you think anti-immigrant sentiment and protectionist ideas would have been rising across Europe to the extent it has?

Do you think that the European banking sector would have been quasi paralyzed for seven years?

And most importantly do you think we would have had 23 million unemployed Europeans?

The answer to all of these questions is NO!

We would have been much better off without the euro. The euro is a major economic, financial, political and social fiasco.

It is disgusting and I blame the politicians of Europe and the Eurocrats for this and I blame the economists who failed to speak out against the dangers of introducing the euro and instead gave their support to a project so economically insane that it only could have been envisioned by the type of people the British historian Paul Johnson called “Intellectuals”.

And don’t say you where not warned. Milton Friedman had warned you that forced monetary integration would cause political disunity and would be an economic disaster. He was of course right.

Bernard Connolly who wrote the book “The Rotten Heart of Europe” warned against exactly what is going on right now. Nobody wanted to listen. In fact Bernard Connolly was sacked from the European Commission in 1995 for speaking his mind.

The sacking of Bernard Connolly unfortunate is telling of lack of debate about monetary policy matters in Europe. Any opposition to the “project” is silenced. The greater “good” always comes first.

There have only been referendums about euro adoption in a few countries. In Denmark and Sweden the electorate have been wise enough to go against the “orders” of the euro establishment. As a consequence both countries today are better off than if the electorate had followed the orders of the elite and voted ‘yes’ to euro adoption.

It is easy to understand the frustration of the European voters. They have been lied to. Unfortunately the outcome is that voters across Europe now are happy to vote for parties like Front Nation, UKIP, Podemos and Syriza. I ask you the cheerleaders of the euro project – is this what you wanted?

I can only say that I can understand the Greek population’s anger over seven years of economic and social hardship and I likewise can understand that the taxpayers of Finland don’t want to pay for yet another meaningless bailout of Greece. But you should not blame each other. You should blame the European politicians who brought you into the euro.

Blame the eurocrats who never understood Hayek’s dictum from his great book “The Fatal Conceit”:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The euro is a fatal conceit.

UPDATE: I now have some empirical evidence that the euro is indeed a Monetary Strangulation Mechanism.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: or

“You are both gentlemen…or something” – debating Greece with Lorcan Roche Kelly

This week I spoke at Camp Alphaville in London. It was good fun. Among other things I had great fun arguing with my good friend Lorcan Roche Kelly about Greece. As usual Lorcan and I do not agree on anytihing.

See the “fight” here.

And if you want to see Lorcan and I arguing last year at Camp Alphaville about the ECB (Lorcan claims he won that argument…) see here.

PS FT Alphaville’s Cardiff Garcia orchestrated the whole thing.

PSS see also my earlier post How the RECOVERY will look like when Greece leaves the euro.

Hypermind prediction: Nearly 50% probability of Grexit in 2015

Have a look at the latest numbers from Hypermind’s prediction market on the likelihood of Greece leaving the euro in 2015.

Grexit probability

In my view this likely is also the kind of probability that the rest of the financial markets put on Grexit in 2015 and given the relatively calm reaction in the European markets to recent developments then this a fairly good indication that we would not face an European financial armageddon if Greece were to leave the euro area.

In this regard it is also worthwhile noticing that Hypermind also runs a prediction market for euro zone GDP growth in 2015 and if anything the expectations for GDP growth have inched up slightly recently (to around 1.5% around 1.4% a month ago). Said in another way there seems to be little correlation between the increased likelihood of Grexit and euro zone growth expectations.

HT Maxime Cartan

The race to default…is it time for ‘Puerto Ricixt’?

It has been characteristic about the Great Recession that so relatively few countries have defaulted given the scale of the financial distress and the slump in economic activity. But it now seems to be changing. Greece this weekend moved dramatically closer to a sovereign default and the Ukrainian government has signaled that it could effectively default in July.

And now this from the commonwealth of Puerto Rico (from the New York Times):

Puerto Rico’s governor, saying he needs to pull the island out of a “death spiral,” has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.

The governor, Alejandro García Padilla, and senior members of his staff said in an interview last week that they would probably seek significant concessions from as many as all of the island’s creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment.

“The debt is not payable,” Mr. García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

…Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.

Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.

Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.

Still, Mr. García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts.

He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.

…With some creditors, the restructuring process is already underway. Late last week, Puerto Rico officials and creditors of the island’s electric power authority were close to a deal that would avoid a default on a $416 million payment due on Wednesday.

…“My administration is doing everything not to default,” Mr. García Padilla said. “But we have to make the economy grow,” he added. “If not, we will be in a death spiral.”

A proposed debt exchange, where creditors would replace their current debt with new bonds with terms more favorable to Puerto Rico, signals a significant shift for Mr. García Padilla, a member of the Popular Democratic Party, who was elected in 2012.

…He said that when he took office, he tried to balance the fiscal situation through austerity measures and fresh borrowing. But he saw that the island was caught in a vicious circle where it borrowed to balance the budget, raised the debt and had an even bigger budget deficit the next year.

…“There is no U.S. precedent for anything of this scale or scope,” according to the report, one of whose writers was Anne O. Krueger, a former chief economist at the World Bank and currently a research professor at the School of Advanced International Studies at Johns Hopkins University.

…Some officials and advisers say Congress needs to go further and permit Puerto Rico’s central government to file for bankruptcy — or risk chaos.

It is hard to miss the similarities between Puerto Rico and Greece, while Greece is a independent country Puerto Rico is a commonwealth within the USA, but both share the fact that they are part of a bigger currency union.

So if we wanted to formulate a theory of default we might want to bring in two elements – an in-optimal currency union (and too tight monetary policy for some members of the union) and serious moral hazard problems due to the perceived high likelihood of a bail-out by the big brother – the US government in the case of Puerto Rico and the European taxpayers in the case of Greece.

PS Ukraine and Venezuela are also on the path to default, but that I believe are quite different stories.

PPS What do we call it if Puerto Rico gives up the US dollar? Puerto Ricixt?

We need a mechanism for sovereign debt crisis resolution

In the future I will be writing a weekly column for the Danish business daily Børsen. The first column appears in today’s edition of the newspaper (you can read the article in Danish here). International news outlets and newspapers interested a syndication deal on my new weekly column are welcome to contact me (

On this occasion I here share the English translation of the article:

We need a mechanism for sovereign debt crisis resolution

Recently nearly all the news flow in the financial media has been about the risk of a Greek sovereign default. But Greece is not the only country, which is currently in serious risk of a default. The same is the case for Ukraine, Venezuela and Puerto Rico. Thus, if we are unlucky, we might get 3-4 sovereign defaults within the next 1-2 months.

It is quite obvious that a possible Greek or Ukrainian sovereign default is something that contributes to the uncertainty surrounding especially the European economy and it is clear that this is contributing to increasing volatility in global financial markets.

The main source of uncertainty in relation to sovereign default is uncertainty about when it happens and what creditors that will be affected.

If we compare a sovereign default with a company or a bank going bankrupt, then it is the case that we in most developed economies in the world have relatively clear rules on how a possible bankruptcy should be handled in legal terms.

It is usually the case that a company in financial trouble under certain conditions can go into receivership, while trying to see if the company can be rescued. And if this rescue attempt fails then there will be quite clear rules about what creditors are first in line when the estate is made up.

Such mechanisms mostly ensure that an orderly and controlled restructuring or liquidation of the company can take place and at the same time ensure the greatest possible transparency about who will bear any losses.

Unfortunately we don’t have similar rules and mechanisms when it comes to sovereign defaults. As a result even a minor risk of a possible sovereign default creates unnecessary volatility in the global financial markets.

This, however, need not be the case and one may wonder why we in the EU hardly have discussed the possibility of organizing a mechanism within the EU, or at least within the euro area, which can ensure a more transparent and proper handling of threatening sovereign defaults.

In 2010, the four economists – including the former chief economist of the World Bank Anne Krueger – put forward a concrete proposal for “A European mechanism for sovereign debt crisis resolution”. The plan for example included a proposal for a special European court to oversee the process of debt negotiations and debt restructuring. Such a court and clear rules on debt restructuring would greatly help to make the handling of the sovereign debt crises much less politicized than it is today.

Unfortunately, the proposal has not received much attention among European decision-maker, and one can only fantasize about how much easier the handling of the Greek debt crisis would have been if we had such rules and mechanism for orderly debt restructuring in place in recent years.

Companies go bankrupt. And so does governments. We therefore urgently need to set up institutions and mechanisms to handle sovereign defaults.


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