The situation in Europe has now become deeply scandalous.
People's lives are being ruined and national governments are teetering on the edge of destruction.
It's not as if Europe has suffered some devastating plague that wiped out its human population. There's no war. There's not a blight creating a food shortage. Martians have not run off in the night with Europe's productive capacity.
And yet we're staring into the abyss. The dominoes are falling.
Private investors are fleeing from many of Europe's public bond markets. Places like Italy, Spain and Portugal are finding it difficult to borrow at sustainable interest rates. At some point, interest rates will get so high that more defaults will be triggered as countries are unable to roll over old debt to new. Even Germany could lose access to private markets at some point.
All of the problems arising from Europe's sovereign debt burden could be alleviated with a few keystrokes in Frankfurt.
But the domino effect could be stopped by adopting a simply policy of interest rate targeting by the European Central Bank. The ECB could simply declare that certain countries—perhaps everywhere that isn't Greece—are in a "zone of protection." For countries within that zone, the ECB would adopt a policy of not permitting interest rates to rise above a certain level. When private markets attempt to push rates higher, the ECB would simply buy the bonds itself with newly created money, reducing rates to within the official boundaries.
It's scandalous that Europe's political elite cannot get the ECB to act like a central bank. Like, say, the Federal Reserve. What's the point of a central bank if it won't do central banking?
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