The European debt crisis has had a stranglehold over the stock market for the past few months. This article will be about new solutions for the problems we face in Europe. For the past two plus years, Europe has been paralyzed in fear and unable to solve its problems. I will start with ideas to control European debt loads and end with ways to get growth started again. I believe the solutions in Europe lie not just with austerity or growth, but in a combination of smart austerity with smart growth.
Over the last few years, rescue loans have been given to Greece, Portugal and Ireland. While they have been trying to pay off these huge loans, all of their economies are falling into recession. This will make it infinitely harder for them to pay off these loans and the existing debt they already have. To combat this, I would boldly recommend extending the payment terms for these loans over a thousand year period and reduce the interest rates on them to below .01%. This may seem like a drastic measure, but we need to face reality someday. These three countries can't pay off their loans in the current structure and the debt from their bond auctions. This will also free up capital to use in creating economic growth.
The other two countries facing a major debt crisis in the Euro equation are Spain and Italy. These two countries are in theory too large for the European Union to bail out. To combat this over the last few years the idea of Euro bonds have been raised. This would allow all European countries to issue bonds at a European interest rate in lieu of their national interest rate determined by the European financial markets. Forget the Euro bonds, we need something bigger and bolder to help Italy and Spain solve their problems. I would propose a new crisis bond be created. It would be only issuable by struggling countries in the Euro to help them overcome their funding problems. It would work by using the lowest interest rate to issue bonds in the world economy at that time. If the U.S, for example, had the lowest interest rates in the world for bonds being issued at the time then the crisis, bonds would be issued at those interest rates in struggling European countries. To guarantee the interest rate these bonds would need to be guaranteed by the International Monetary Fund, World Bank and European Central Bank. When they get the debt crisis under control, these nations could stop issuing the crisis bonds and go back to their national bonds.
Global Tax Incentives
Many economists talk about the need for creating economic growth in lieu of the austerity being proposed and implemented currently. While they talk about the need for growth, they very rarely talk about specific ideas to create economic growth. I would recommend the major economic nations in the world come together and offer tax incentives for global corporations that open new stores in Italy, Ireland, Portugal, Spain and Greece. Some companies that would benefit from this are McDonald's (MCD) or Yum brands (YUM). To give you an example, say, for every ten stores McDonald's opens in the struggling economies, they get a 1% tax rate deduction on their income taxes in France, Germany, the U.K., the U.S., Russia, Japan and China. Smaller countries could also be involved, but they wouldn't have as great an impact due to the size of their economies/tax base for these global corporations. While this wouldn't be a popular idea in many of the countries listed above, I think the sooner we come to the realization that this is a global crisis and not a European crisis, the sooner we can solve this problem. I'm sure most investors are tired of the fate of their portfolios being tied to what happens in Europe.
Over the weekend it was announced that Spain would get a €100 billion loan to recapitalize its banks. The main reason behind this was to stop a run on banks. To combat runs on banks in Spain, Greece and other struggling Eurozone nations, I would recommend that the European Central Bank insure deposits in the struggling banks up to €100,000.00 (approx. $125,000.00). In the European countries that aren't in a financial crisis, the Eurozone could create a private insurance system banks could buy for their depositors to give them the €100,000.00 (approx. $125,000.000) of coverage. This would take a bit of the stress off of the European Central Bank, so the world wouldn't rest on their shoulders. This would stop the run on banks and allow European banks to recapitalize easier. When the crisis starts to come under control, the countries covered by the European Central Bank could switch to the privately insured system.
While Europe is an incredibly indebted continent, it is also a continent of extremely wealthy individuals. I would like to see the creation of a charity system sort of like the current lending system presented by a company like Lending Club. Lending Club allows investors to give money to loan to people based on which loans they see value in. The charity organization would have a list of public work projects that philanthropists could help fund. The philanthropist would give money to their favorite projects, and when all the money was donated for a specific project, that project could commence. This would allow for struggling economies to get jump started with new construction, renovations and beautification projects.
We need to start thinking of new and innovative solutions to the Eurozone crisis. The sooner we figure out how to solve a problem the sooner the problem gets solved. To give you an example of an innovative idea to create growth, the Eurozone could declare a continent wide holiday called Go Out and Buy Something Day. Most people would think this idea was ridiculous, but to come up with the innovative solutions, we need to solve the Eurozone crisis, and we need to put all the ideas on the table and figure out what works best and then implement it.
I would like to ask those who read this article to comment with their thoughts and ideas for fixing the Eurozone crisis. It's time to get the conversation started on what the world needs to do to fix the Eurozone crisis.