Currency wars, extra-national stimulus and Krugmania!: 5 best unusual solutions to the eurozone crisis

Five unusual solutions to the eurozone crisis, just in case you're bored of the ones that might actually happen.

1. The US and UK should engage in a currency war with the EU.

The problem the eurozone has is that European Central Bank president Mario Draghi is fashioning himself as the man with a carrot and stick. He knows that monetary policy can't solve all of the area's problems, and that national governments need to step up and do something to help the situation. Sadly, the policy he wants is more fiscal integration, which most countries are terrified of.

If European governments fall in line, then Draghi would be likely to implement the monetary easing which could really help the continent. Unfortunately, given the integration he demands is not forthcoming (because Germany is terrified of taking on Spain's debt and Spain is terrified of being a vassal state to Germany), it doesn't seem like the ECB is going to make any positive moves in the short term, instead choosing to futilely dangle the carrot a bit longer.

So what is to be done? Well, a worldwide crisis needs a worldwide solution. The Federal Reserve or the Bank of England could unilaterally start buying up euros. Matt Yglesias writes:

If the ECB just sat back and relaxed, that would make Europe's problems even worse. But the most likely scenario would be massive retaliation by the ECB and much-needed transatlantic monetary stimulus.

Of course, it's true that this solution counts on the ECB reacting in a non-insane manner, which has only occasionally been a good betting strategy.

2. If you like stimulus so much, why don't you live there?

If the rest of the world wants a solution which removes agency from the hands of the ECB and Mario Draghi entirely, then ex-Federal  reserve official Joseph Gagnon's suggestion, submitted to the Washington Post's WonkBlog, may work:

There are two other individuals who have the same power as Draghi to end the euro crisis: Ben Bernanke and Zhou Xiaochuan. The Fed could do the next QE3 entirely in Spanish and Italian bonds and it would not require a vote in Congress or Presidential approval. It would push the euro up against the dollar, but Europeans would not be in a position to complain. The People’s Bank of China is estimated to hold nearly 1 trillion euros already and it could switch them from German bonds to Spanish bonds.

In other words, rather than telling the Europeans to do some monetary stimulus, or attempting to force their hands with a currency war, the US or China could simply pump money into the European periphery. Normally, of course, if you're going to stimulate somewhere, you would rather it was your own country; but if you can stop a worldwide slump following the collapse of a massive currency bloc, that's a pretty good use of your time as well.

3. Krugmania!

A recent ING analysis (pdf) runs through six possible scenarios for the eurozone, including "Draghia" (where everyone gives in to Draghi, makes a banking union, and he does fiscal stimulus), "Inflationia" (sort of the Eurozone voluntarily doing what is described in point one) and "Bondia" (Europe introduces "eurobonds", all the countries pooling their costs of borrowing).

But if we're looking at unlikely solutions, then their sixth scenario, "Krugmania", fits the bill. It calls for lots of fiscal stimulus, mainly used for public investment, and the ECB not raising interest rates every time inflation peaks. If matched with a commitment to reducing deficits over the long term only, ING see this plan adding 3 per cent to GDP and 2 per cent to employment throughout the eurozone over the next two years.

4. Greece defaults but doesn't exit

John Cochrane, a professor at the University of Chicago, is annoyed that Greece defaulting on its debt is always spoken of in conjunction with a Grexit:

The two steps are completely separate. If Illinois defaults on its bonds, it does not have to leave the dollar zone -- and it would be an obvious disaster for it to do so.

It is precisely the doublespeak confusion of sovereign default with breaking up a currency union which is causing a lot of the run.

But the main reason why default is spoken of is that doing so allows Grexit, which allows devaluation and a recovery in exports. Cochrane suggests that it be viewed another way:

They need to say they will tolerate sovereign default, bank failures, and drastic cuts in government payments rather than breakup.

Yes, cuts. The question for Greece is not whether it will cut payments. Stimulus is off the table, unless the Germans feel like paying for it, which they don't. The question for Greece is whether, having promised 10 euros, it will pay 10 devalued drachmas or 5 actual euros. The supposed benefit of euro exit and swift devaluation is the belief that people will be fooled that the 10 Drachmas are not a "cut" like the 5 euros would be. Good luck with that.

In other words, rather than defaulting in order to exit, default in order to avoid the exit. In this scenario, Greece is a sort of sacrificial lamb; they're damned if they do, or damned if they don't, but the rest of the eurozone is only damned one way. If they take the cuts and stay in the currency, maybe Spain and Portugal can be saved, at least.

5. Pan-european austerity

Actually, maybe not. Yeah, probably wouldn't work. No, not even for Estonia, despite what the President says. Especially given the "there's no money left" argument doesn't really work when people are paying Germany to take their euros.

Pictured: A Currency War. Maybe. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Brexit will hike energy prices - progressive campaigners should seize the opportunity

Winter is Coming. 

Friday 24th June 2016 was a beautiful day. Blue sky and highs of 22 degrees greeted Londoners as they awoke to the news that Britain had voted to leave the EU.  

Yet the sunny weather was at odds with the mood of the capital, which was largely in favour of Remain. And even more so with the prospect of an expensive, uncertain and potentially dirty energy future. 

For not only are prominent members of the Leave leadership well known climate sceptics - with Boris Johnson playing down human impact upon the weather, Nigel Farage admitting he doesn’t “have a clue” about global warming, and Owen Paterson advocating scrapping the Climate Change Act altogether - but Brexit looks set to harm more than just our plans to reduce emissions.

Far from delivering the Leave campaign’s promise of a cheaper and more secure energy supply, it is likely that the referendum’s outcome will cause bills to rise and investment in new infrastructure to delay -  regardless of whether or not we opt to stay within Europe’s internal energy market.

Here’s why: 

1. Rising cost of imports

With the UK importing around 50% of our gas supply, any fall in the value of sterling are likely to push up the wholesale price of fuel and drive up charges - offsetting Boris Johnson’s promise to remove VAT on energy bills.

2. Less funding for energy development

Pulling out of the EU will also require us to give up valuable funding. According to a Chatham House report, not only was the UK set to receive €1.9bn for climate change adaptation and risk prevention, but €1.6bn had also been earmarked to support the transition to a low carbon economy.

3.  Investment uncertainty & capital flight

EU countries currently account for over half of all foreign direct investment in UK energy infrastructure. And while the chairman of EDF energy, the French state giant that is building the planned nuclear plant at Hinkley Point, has said Brexit would have “no impact” on the project’s future, Angus Brendan MacNeil, chair of the energy and climate select committee, believes last week’s vote undermines all such certainty; “anything could happen”, he says.

4. Compromised security

According to a report by the Institute for European Environmental Policy (the IEEP), an independent UK stands less chance of securing favourable bilateral deals with non-EU countries. A situation that carries particular weight with regard to Russia, from whom the UK receives 16% of its energy imports.

5. A divided energy supply

Brexiteers have argued that leaving the EU will strengthen our indigenous energy sources. And is a belief supported by some industry officials: “leaving the EU could ultimately signal a more prosperous future for the UK North Sea”, said Peter Searle of Airswift, the global energy workforce provider, last Friday.

However, not only is North Sea oil and gas already a mature energy arena, but the renewed prospect of Scottish independence could yet throw the above optimism into free fall, with Scotland expected to secure the lion’s share of UK offshore reserves. On top of this, the prospect for protecting the UK’s nascent renewable industry is also looking rocky. “Dreadful” was the word Natalie Bennett used to describe the Conservative’s current record on green policy, while a special government audit committee agreed that UK environment policy was likely to be better off within the EU than without.

The Brexiteer’s promise to deliver, in Andrea Leadsom’s words, the “freedom to keep bills down”, thus looks likely to inflict financial pain on those least able to pay. And consumers could start to feel the effects by the Autumn, when the cold weather closes in and the Conservatives, perhaps appropriately, plan to begin Brexit negotiations in earnest.

Those pressing for full withdrawal from EU ties and trade, may write off price hikes as short term pain for long term gain. While those wishing to protect our place within EU markets may seize on them, as they did during referendum campaign, as an argument to maintain the status quo. Conservative secretary of state for energy and climate change, Amber Rudd, has already warned that leaving the internal energy market could cause energy costs “to rocket by at least half a billion pounds a year”.

But progressive forces might be able to use arguments on energy to do even more than this - to set out the case for an approach to energy policy in which economics is not automatically set against ideals.

Technological innovation could help. HSBC has predicted that plans for additional interconnectors to the continent and Ireland could lower the wholesale market price for baseload electricity by as much as 7% - a physical example of just how linked our international interests are. 

Closer to home, projects that prioritise reducing emission through tackling energy poverty -  from energy efficiency schemes to campaigns for publicly owned energy companies - may provide a means of helping heal the some of the deeper divides that the referendum campaign has exposed.

If the failure of Remain shows anything, it’s that economic arguments alone will not always win the day and that a sense of justice – or injustice – is still equally powerful. Luckily, if played right, the debate over energy and the environment might yet be able to win on both.

 

India Bourke is the New Statesman's editorial assistant.