Monday, December 19, 2011

Feldstein on euro crisis

Harvard Professor Marty Feldstein offers his take on the euro crisis in last week's WSJ, one that is well worth reading.  Feldstein says we should ignore all the claims from the last summit that the crisis has been resolved (sounds familiar, huh?) because there is no enforcement mechanism in the agreement. This makes him very skeptical about greater economic and political integration being a long term solution. 

Instead he thinks that we need to take a country-by-country approach.  Feldstein is relatively optimistic that Italy will be able to have a balanced budget by 2013, which should dramatically lower its borrowing costs.  He considers Greece to be a lost cause and predicts it will default and replace the euro with a much-devalued drachma.

Feldstein's biggest concern is that private lending will dry up -- as it did in the US in 2008 -- because "banks are uncertain about the liquidity and solvency of potential counterparties."  Solution: have the European Central Bank step in and provide liquidity to banks with adequate collateral. 

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