Sachs on the euro crisis

Columbia University economist Jeffrey Sachs wants increased liquidity in the eurozone, “even if that means a few billion more euros for Greece in the face of the steep recession”.  What Professor Sachs seeks, though he never uses the term, is a bail-out of Greece on very generous terms. This will be difficult – impossible? – to sell to taxpayers of Austria, Germany, Finland and the Netherlands, who were promised a strict ‘no bail-out’ clause when they gave up their national currencies.

[S]hortsighted German politicians opine that Germany could actually benefit if Greece is forced into default, or even out of the euro. Nothing could be further from the truth. Germany now risks the destruction of its own and Europe’s prosperity if it continues to ignore the interdependence of all of Europe’s economies. ….

Greece is at the precipice of social instability. Further cuts will push it over the edge – ending the adjustment programme, and intensifying the financial squeeze and the drumbeat of those trying to push Greece out of the eurozone. It is utterly naive to believe that the downward spiral would stop there. Italy, Spain, Portugal, Ireland, and even France could quite possibly be next, with the risk of bank runs pulling the entire edifice of monetary co-operation into rubble. ….

The steps needed to avoid the abyss are clear. Greece needs working capital, backed by the ECB and the European Investment Bank, to prevent a panic-induced implosion. ….

[Chancellor Angela] Merkel will have her hands full keeping her colleagues quiet and persuading the German people [and others in Europe] to support the eurozone. …. It will also help if she encourages the ECB to behave like a central bank, not a commercial bank, by exercising its lender of last resort functions in the midst of a financial panic.

Jeffrey Sachs, “German hotheads are close to destroying the euro“, Financial Times, 15 September 2011.


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