Happy 2013? | vox - 0 views
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Hopefully the following ten observations are less controversial in 2013 than in previous years.
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Besides, having been there, no one really wants to unleash inflation anymore. That leaves us with real GDP growth as a necessary condition for bringing the debt-to-GDP down painlessly.
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But in today’s world voters are angry at everything that is called Europe and will not back a fiscal union.
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This means that the need for dissolving the euro back into national currencies at almost any cost has evaporated.
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Banks are at the heart of a diabolic loop: bank holdings of their national public debts (Brunnermeier et al., 2011).
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The long-hoped-for awakening of the ECB has produced several miracles, especially a major relaxation of market anguish.
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Massive forbearance has allowed many banks to not fully account for the losses that they incurred in 2007-8.
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The ECB may act as lender in last resort to banks and governments, but who will bear the residual costs?
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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.
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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.
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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.