European debt crisis: what is the answer?

27th September 2011

News is dominated by the crisis, with The Daily Telegraph reporting that George Papandreou, the Greek prime minister, has been speaking at a German industry event ahead of his dinner with Angela Merkel this evening.

He is reported as saying he can "guarantee that Greece will live up to all its commitments." "I promise you we Greeks will soon fight our way back to growth and prosperity after this period of pain."

At the weekend news began to spread that the Euro zone was preparing plans for a Greek default and that this default would involve a 50% write off or haircut for her existing debts, writes Mindful Money blogger Shaun Richards.

Possible solutions to the crisis that have been discussed, reports Citywire, include allowing a 50% Greek default, quadrupling the European Financial Stability Fund (EFSF) to €2 trillion to protect creditors from such a default, and recapitalising European banks.

Seeking Alpha says: "Since it has emerged after the G-20 meeting that the euro area's political leadership is seriously considering leveraging the European Financial Stability Facility (EFSF) via the ECB or some other mechanism (frankly, the ECB seems the most likely choice), the usual cacophony of squabbling, affirmations and denials has begun to emanate from Europe."

But what investors want to know, amid the noise, and what isn't being widely reported is – what do economists think the answer is?

Fergus comments on Shaun's blog: "I would love to hear what you think the ECB should do, assuming that political and fiscal union doesn't come along radically expanding their options."

Shaun Richards responds : "How about the ECB abandoning the SMP and handing the 156.5 billion nominal Euros of debt (but worth much less) over to say the European Commission? A vehicle would have to be constructed to take it and there would have to be the beginnings of a type of fiscal union so it would have to be split from some EU/EC funds as countries like the UK are not in the Euro.

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