Tag Archives: inflation

America May Save the Euro

Some new and more radical solutions are beginning to be discussed about how to save the Euro from collapse. One of these solutions is for the IMF to provide funding for Italy and Spain if they need help. They are thought to be planning an $800bn bailout package, but the deal would mean the European bailout fund would have to underwrite the first 30% of any defaulted debt, therefore they still need the €1 trillion in the bank (which still poses the same problem of where to get that from), and they also suggest the bail out fund begin to issue bonds. This would mean many other countries other than Eurozone ones, helping bailout the Eurozone. America contributes 17% to the IMF, consequently, America would send Italy $136 billion under this deal!

Another solution is that the US Fed, buys up the European countries bonds. These are currently all but unsellable. By doing so, the borrowing costs of Spain and Italy would fall overnight, and the US Fed would in effect take the place of lender of last resort, a role the European Central Bank has thus far refused to fill. However, there are two problems with this plan: firstly it could hurt the dollar, and secondly inflation, as it would have the same effect as printing money. The fear of inflation is one of the issues which has hampered action being taken. Germany has an unhappy history with inflation, and the German people and government are wary of anything that may trigger it again. But, many respected economists believe the main threat facing Europe is hyper-deflation.

However, neither of these solutions deal with the underling cause of the crisis. That of a single currency operating with a 30% misalignment between north and south; only the exit of either the wealthy northern states, or the exit of the poorer PIIGS states can solve that. Perhaps some US imposed inflation will make this prospect seem more palatable to the German’s?

With the European stale-mate still very much evident, it looks more likely that the rest of the world will have to take action in order to avoid a global depression, worse than that of the 1930’s financial crash.