Five Policy Options in Face of Euro Crisis

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The current problem of euro zone can be characterized as the internal distribution of saving and investment. The euro zone as a whole has sufficient saving to finance the investment. Although there is an excess of saving in northern Europe, savers in the north are unwilling to finance southern Europe due to the current crisis. Although German has a current-account surplus, which is more than enough to cover the current account deficit of the rest of euro zone countries, there is no sign of convergence across regions.

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Typically in a debt crisis, there are three options: bailouts, debt discounts, and debt forgiveness. The latter two are also referred as debt restructuring. For example, during the Latin America debt crisis in the 80s, the bailout option was adopted first, and followed by discount and forgiveness due to its ineffectiveness. The euro zone crisis is no exception, except that it also involves a common currency and members. Thus, whether euro should be abandoned and whether some or all of its members should exit the euro zone become a heated issue. In face of euro crisis, internal devaluation and bailout has been actively pursued and much criticized. Such criticisms led to four other options advocated by major economists: restructuring of debts, devaluation of euro, default and partial exit of peripheral countries, and finally, a complete elimination of euro. If things cannot change for the better, worries would be vindicated and some version of other options could be introduced to complement the current policy.

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