The Eurozone Needs More than QE

It also brought back that scarcest of assets confidence in the viability of the eurozone economy and its currency, the euro.

Likewise, today s euro crisis is harder to resolve because of the euro s strength in currency markets.

This would provide temporary relief from a fatal flaw in the euro design s until the member countries devise a more permanent solution.

It can continue to do no more than the minimum to preserve the euro.

Of course, if interest rates also were being cut in the euro zone, the fall in the dollar against the euro would be moderated.

Despite today s problems, the eurozone is not only richer, but also economically sounder, than most other countries and regions.

Those who argue that one or more countries on the eurozone s periphery should take a holiday from the euro underestimate both the economic and political repercussions of such a move.

These economic adjustments could occur much more smoothly if the eurozone as a whole were to pursue a more expansionary policy.

The euro s increasingly important role brings stability, something that is never more important than in times of upheaval.

Germany remains willing to do the minimum and nothing more to hold the euro together, and the EU s recent steps have merely reinforced German resistance to further concessions.

To revive growth, the ECB needs to stop raising interest rates and reverse course. The eurozone should also pursue a policy partially via looser monetary policy that weakens the value of the euro significantly and restores the periphery s competitiveness.

Germany s credit rating would not be endangered, because Eurobonds would compare favorably with bonds issued by other major countries.

What is certain is that delaying much needed reforms would be more than risky it would spell disaster for the eurozone.

But, in the case of the euro crisis, price stickiness caused inflation to increase more in debtor countries than in creditor countries, making adjustment even more painful.

Many European leaders believe that the rest of the world owes the eurozone a bailout because the currency union is just an innocent bystander.

The second possibility is a more pronounced devaluation of the dollar, bringing it well beyond the current levels relative to both the euro and the yen.

The franc fell 8.8 against the euro, 9.5 against the dollar, and at least 8.2 against all 16 of the most active currencies on the day of the announcement.

But, at a minimum, the outcome is likely to speed up implementation of eurozone decisions that have already been made, leading to somewhat more expansionary economic policies in both Germany and the eurozone.

A Euro Sabbatical

NEW YORK While the risk of a disorderly crisis in the eurozone is well recognized, a more sanguine view of the United States has prevailed.

Presumably, the eurobonds would be under the control of the eurozone finance ministers.

Germans have long been among the most europhile of peoples, but their mood has gradually been turning against Europe and its common currency, the euro.

So he recently toned down his rhetoric by warning that euro zone inflationary pressures should not be over dramatized.

In the European Union, for example, public debt in the most important eurozone and EU countries would rise to 100 of GDP or more in the next ten years alone.

With Merkel s active help, the eurozone is (in effect) moving towards becoming a transfer union the stricter the new rules and the larger the interest rate spreads among eurozone countries, the faster that will happen.

All of this requires financing bank recapitalization alone could require hundreds of billions of euros (though these needs would be mitigated somewhat if the sovereign debt of large eurozone countries looked healthier).

Because European interest rates no longer are clearly out of whack with the fundamentals of the euro zone economy, monetary policy has become more complex.

As a result, Germany bound itself to the idea of ever closer union even more definitively by pledging to join the common European currency, the euro.

Expansive, growth based policy could work better in Germany than in many eurozone countries for which it is being prescribed.

But, unless all Europeans accept responsibility for saving the euro and, with it, the EU everything else is shallow rhetoric.

Unfortunately, there is a real danger that we may see the opposite, with the euro going to 1.50 or beyond.

Greece s imports now exceed its exports by more than 4 of its GDP, the largest trade deficit among eurozone member countries.

Of course, I am confident that the eurozone s ongoing sovereign debt crisis will be overcome, and that a more integrated and effective Europe will emerge.

Can the Euro be Saved?

The higher the volume of eurobonds a country seeks to issue, the more severe the conditions the Board would impose.

Germany s response to the crisis was more than financial it was symbolic of the Merkel government s recognition of the prohibitive cost of a country exiting the eurozone.

Setting a cap on Target accounts is a fundamentally more appropriate policy to keep current account deficits in check than the wage policies contemplated by the new Pact for the Euro.

This pattern can be only partly repeated in the eurozone, where both debt socialization and a return to normal risk assessment appear more difficult.

Even German government officials now concede that something more than fiscal belt tightening is needed to revive the economies of the eurozone periphery.

Third, the position of the euro will strengthen over time as more countries will join the euro zone.

The European Central Bank managed to relieve an incipient credit crunch through its long term refinancing operation (LTRO), which lent over a trillion euros to eurozone banks at one percent.

As more than 90 per cent of the secretariat's expenditures are based on the value of the euro, budget projections in euros will be accurate over the entire financial period and protected against exchange rate fluctuations.

The euro s becoming a major reserve currency bestows important economic advantages on the euro zone economy.

Now he says that Germany should exit the euro if it continues to block the introduction of Eurobonds.