The European Central Bank is missing a huge opportunity to start putting the European economy back on track and stabilize the financial morass that is clouding Europe’s potential and for that matter the rest of the world. With the recent arrival of Mario Draghi and the almost immediate interest rate cut, there is an opportunity to take the necessary steps to instill confidence in Europe’s ability to handle its crisis. It is time for some bold action and the adoption of new techniques to combat the current crisis.
If Europe keeps on going down its current path it is inevitable that global economies, markets and ultimately hard working people will pay a dire toll. The time has come to reckon with binary choices: amputate or stop the bleeding.
The first choice, to amputate, would entail allowing sovereign borrowers to default en masse given the unsustainable debt loads many countries carry. This process would be painful and would have a long recovery period that could create more secondary effects than attempting to stop the bleeding. We can all imagine the repercussions of allowing defaults to occur. Stopping the bleeding would entail a pledge by the ECB to monetize debt which would allow for many positive outcomes if allowed:
- It would instill immediate confidence back into European sovereign bond markets.
- This would in turn lower cost of capital and uncertainty given the strong message to backstop the trajectory of the European economy much like what the US was able to do through quantitative easing.
- It would likely weaken the Euro vs. a basket of currencies which would make European goods and services more competitive globally driving up sales and for that matter taxes to pay back loans, etc. (Germany would be a prime beneficiary so they should have little reason to object).
- It would allow sovereign issuers to opportunistically issue long-term debt (10+ year maturities) to the ECB and go out and retire outstanding debt preferably shorter maturities and higher coupon tranches.
Europe in essence is suffering the consequence of its own perilous policies and unsustainable spending through borrowing. To borrow from what much of the Corporate Credit sector went through back in 2008 and 2009, European sovereigns can take some steps to extend their runway, attract investors and lower cost of borrowing. Austerity measures at this juncture are unavoidable which will translate into subpar growth going forward for the European bloc. However, the abyss can be avoided and countries can claw back and the global economy can be given a chance to find level ground to set foot on and move forward.
Granted laws may have to be relaxed to accomplish what is needed but the European Union needs to adapt to the 21st Century to either be more unified than what recent behavior has suggested. If the EU is to succeed then everyone has to keep the ship afloat, given the limited quantities of both life vests and rafts.