At TTCM we have maintained that their are two ways to resolve the European crisis. The first way is to abandon the Euro currency and allow struggling countries to depreciate their currencies as has been the model for a millenium, prior to the establishment of the Euro. The second way is to adopt the same federal plan instituted by Alexander Hamilton after the American Revolution, when the federal government assumed the debts of the states in exchange for the establishment of the capitol city being in Virginia. The ECB or some other European institution must be able to issue debt in times of crisis, but to be able to do that the Europeans need to adopt some version of fiscal uniformity. The LTRO was a great maneuver is providing liquidity and buying time but structural issues must be dealt with. We’ve never believed that austerity by itself would solve this problem and we believe the Teutonic impetus in that direction has caused its share of problems. The only reason that judgement day is coming more quickly for the EU than the United States or Japan is because they don’t have the ability to depreciate their currency. The structural issues must be dealt with in all of these developed economies, and this will mean less entitlements, more streamlined government spending, and slower economic growth.
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