EURO-CRISIS: The World economy is floundering around in a sticky morass. Politicians meet and talk up a succession of short-term pseudo solutions. Unfortunately the heart of the problem is trying to work multiple national budgets in the context of a single currency that cannot float to reflect their true value, read risk, associated with national borrowings versus GDP. A real solution must work Europe towards incrementally merging their budgets into one or dividing the Euro into a number of strata that can float relative to each other. Underpinning the problem is some countries spending well beyond their means over a sustained period because weak politicians cater to the call of the masses for lower taxes and higher welfare spending and some national cultures endorse cheating on taxes and entitlements almost as a way of life.
Europe needs a combination strategy whereby first the currency is stratified based on debt to GDP ratios, each strata then work on merging their budgets within each particular strata, and finally those strata are reintegrated under a single budget. That one budget for Europe as a whole would manage the big economic picture, collect personal and corporate income tax and allocate funds in particular categories of spending to national budgets – much as happens in Australia between Federal and State Governments. A task force drawn from the executive arm of the European Parliament and other international economic bodies urgently need to develop step-by-step legislative implementation plans. Mathematical modeling would underpin decisions on just how to calibrate the various mix options and associated thresholds over time in a succession of incremental adjustments. It is my contention that commitment to such a grand strategy would reinvigorate international market confidence, allow complex risks to be managed successfully, and lead to a much stronger and sustainable European if not World economy.
It is of course not all that simple. Some countries, particularly those in most trouble at the moment, are carrying an unfair and massive burden of spending on things like dealing with undocumented immigration. Given the freedom of movement in place within the European Community, these costs should be shared by the whole of Europe and that would need to be taken into account. Furthermore, austerity measures should not be so severe as to counter-productively undermine any productivity growth or disable (as opposed to ration or defer) social welfare compensation which itself should not be more generous than in other countries asked to help shoulder the bill. Discounted or somewhat less valuable Euros for more indebted parts of Europe would be rather unpopular but it would be merely akin to the old strategy of printing more money to devalue a sovereign currency, pay bills that need to be paid, and to underpin and stimulate growth. What is more, the extent of the discount could be controlled or managed so lenders would be better off than with an uncontrolled default. The extent of debt held by countries for any particular member country of Europe is quantified – select any on the map for a debt breakdown at http://graphics.thomsonreuters.com/11/08/EZ_BNKMP0811_SB.swf so equitable coefficients to calibrate an economic model of this solution could be scientifically derived to eliminate subjective bickering between member states as to the level of discount. Exercising the model over time in a simulation of the so networked economies should engender confidence to phase in such a solution for real, reliably predict and monitor levels of growth and debt repayments for each step-wise phase, and calibrate recovery. The IMF and ECB do understand that exuberant lending endangers economies and that interest rates on their own are too coarse a control once debt levels are already too high but they could exercise intensive monitoring to counsel lending institutions and restrain their own impulses to simply shuffle debt around. The key is to rebuild confidence in the market; with that there is money aplenty to underpin growth. The market needs to see that there is an elegant, sustainable and quantitatively balanced way forward in hand.