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But Germany remains opposed on moral-hazard grounds: a joint guarantee of Eurozone members’ liabilities would strengthen individual national governments’ incentive to spend beyond their means.

The German Council of Economic Experts has proposed a European Redemption Fund (ERF). The plan would convert into de facto 25-year Eurobonds the existing sovereign debt of member countries in excess of 60% of GDP, the threshold specified by the Maastricht criteria and the SGP.

But this seems upside down.

it offers absolution precisely on the 60%-of-GDP margin where countries will have the most trouble resisting temptation.

the main explanation for the absence of US moral hazard is that the right precedent was set in 1841, when the federal government let eight states and the Territory of Florida default.

Ever since 1841, the market requires that US states running up questionable levels of debt pay an interest-rate premium to compensate for the default risk.

The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds” proposed two years ago by Jacques Delpla and Jakob von Weizsäcker. Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receive eurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status.

But one thing seems clear. German taxpayers, whose longstanding suspicion of profligate Mediterranean euro members has been vindicated, will not be happy when asked to pay still more for the cause of European integration. At a minimum, they will need some credible reason to believe that 20 years of false assurances have come to an end – that this is the last bailout.

But figures released in 2010, disputed by Malawi’s ministry of agriculture, suggest that the harvest was only 2.1m tonnes. If maize production had risen as much as claimed, Malawians should have have had a surplus of maize and prices should have dropped. That did not happen, says Mr Jerven.

The crisis has delivered a surprising degree of wage flexibility and labour mobility.

This means that the need for dissolving the euro back into national currencies at almost any cost has evaporated.

Sustained real growth should be the number one priority.

This involves massive moral hazard.

Austerity policies must stop, now.

Growth will not return unless bank lending is adequately available.

The ECB may act as lender in last resort to banks and governments, but who will bear the residual costs?

The only remaining option is public debt restructuring, a purging of the legacy.

This will lead to bank failures. This means that debt reductions must be deep enough to make it possible for governments to then borrow, to shift to expansionary fiscal policies and to bail out the banks that they destroyed in the first place, in effect undoing the diabolic loop.

Who will lend? Even the best-crafted bank restructuring will not allow an immediate recovery of market access. The ECB is the only institution in the world that can help out.

There is no easy option for the Eurozone after three years of deep mismanagement. Governments will not accept drastic action unless forced to. This means that we need another round of crisis worsening.

The second element of the debt-relief package would be more innovative: If Greece’s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised. A formula for this could be linked to the debt/GDP ratio

Why bother? Because the very premise of the current deal and the expectations it sets out are wrong. First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% to 124% is fanciful. Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt will then be “sustainable” is absurd.

Make no mistake: policymakers’ track record on forecasting Greek economic performance during the crisis has been an embarrassment. In May 2010, the International Monetary Fund projected – presumably in concurrence with its European partners – that Greece’s annual GDP growth would exceed 1% in 2012. Instead, the Greek economy will shrink by 6%. The unemployment rate, expected to peak this year at 15%, is now above 25% – and is still rising. The debt/GDP ratio was expected to top out at 150%; absent the substantial write-down of privately held debt, which was deemed unnecessary, the ratio would have been close to 250%.CommentsView/Create comment on this paragraphIn September 2010, four months after the official Greek bailout was put in place, the IMF issued a pamphlet asserting that “default in today’s advanced economies is unnecessary, undesirable, and unlikely.” The conclusion was that official financing would carry Greece past its short-term liquidity problems. Calls for immediate debt restructuring went unheeded. Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt was substantially restructured.CommentsView/Create comment on this paragraphSuch were the errors committed over short time horizons.

And, again, even if Greece somehow did achieve the 124% milestone, its debt would still not be sustainable.

Staying the course, as Summers warns, will lead only to “needless suffering” before that course inevitably collapses, bringing Greece – and much else –­ crashing down.

The malign effect of high private debt becomes apparent in the busts that follow credit-driven booms. Households that have borrowed too much in relation to their income trim their spending, the main component of GDP. Overleveraged firms avoid investing and concentrate on shrinking their balance-sheets by paying off loans. As bad debts erode their capital, banks become more reluctant to lend. These adverse trends reinforce each other, increasing the overall drag on growth.

There is an inherent contradiction between the need for debtor countries in the euro zone to regain competitiveness through lower prices and at the same time to ease excessive debt with a dose of inflation.

The anti-bailout part of the FDP platform is the one part of their rhetoric which could successfully take them over the 5% hurdle. The FDP’s complicity in using German taxpayer money to bail out the so-called profligate periphery is a one-way ticket out of Parliament.

“First, the Greek reports come via statements made by Michael Fuchs, CDU deputy Bundestag head and a senior member of German Chancellor Angela Merkel’s party. Fuchs warned earlier today that Germany would veto further aid to Greece if the country has not met the conditions of its previous bailouts.

“Second, all along Germany has indicated that it is resistant to increasing funding of the ESM and EFSF bailout facilities. This presents a problem in the case of Spain and Italy because of the size of those economies.

The long and short of it was that the Germans had reached the end of their ability to support bailouts.

All evidence is that this levy has created panic in Cyprus. After all, what is the use of having a deposit guarantee if government can arbitrarily circumvent it to impose losses on your deposits anyway?

One can't just blame Cyprus for this fiasco. The ECB, EC and European Union finance ministers signed off on the insured deposit grab too]

My view? It was inevitable that we would be in crisis again. The austerity world view of crisis resolution is completely at odds with the capacity of the euro zone’s institutional architecture to handle a crisis.

Greece cannot hope to get its deficit under control fast enough to stabilize its debt and attract private lenders. Instead of remaining a permanent ward of Germany and the IMF, Greece should default on its debt, leave the euro zone, and return to a more competitive drachma.

But he should also make it clear that lending against private collateral should not be used by commercial banks to free up funds to purchase newly issued government bonds

As Italy shows its determination and its ability to reduce future deficits, it should be welcomed back to the capital markets.

excessive and chaotic deleveraging by lenders to emerging Europe – and the ensuing credit crunch – would destabilize this economically and institutionally fragile region.

not surprisingly, Banco de España supervisors had little interest in discovering that Spain’s vaunted regulator had in fact missed the largest financial crisis in the history of the country

Already the first entity that was intervened (CCM) as far back as March 2009, showed that the real NPL levels post intervention (17.6%) were more than twice as large as the reported ones. This should have been the point for the Banco de España to get ahead of the curve by ordering an audit of the whole sector

Even more important was the role of these political connections in diluting the role of the supervisor after the crisis started, in what was meant to be the crisis resolution stage but which was in fact a crisis cover up stage.

What are the takeaways

I would suggest five.

Second, career concerns of supervisors are crucial.

Third, dynamic provisioning is a good idea, but the supervisor must be mindful it may delay decision making in problem cases

Fifth, supervision and an appropriately tough resolution regime must go hand in hand.

Its income per head was 92% of the average of 16 rich economies

Its income per head is now 43% of those same 16 rich economies; it trails Chile and Uruguay in its own back yard.