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    European politicians have been struggling for over a year to solve the European debt crisis. They blame speculators for destabilizing bonds and the monetary union, yet also claim European debt is safe. The EFSF that politicians established is unlikely to achieve stability. If another banking crisis occurred, who would guarantee the EFSF when all countries need money? The document proposes a simple stabilization mechanism where each country pays a tax based on its budget deficit and national debt. The tax revenue would accumulate until countries have a surplus, at which point they would receive part of the funds, incentivizing reducing deficits and debts over the long run.

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    European politicians have been struggling for over a year to solve the European debt crisis. They blame speculators for destabilizing bonds and the monetary union, yet also claim European debt is safe. The EFSF that politicians established is unlikely to achieve stability. If another banking crisis occurred, who would guarantee the EFSF when all countries need money? The document proposes a simple stabilization mechanism where each country pays a tax based on its budget deficit and national debt. The tax revenue would accumulate until countries have a surplus, at which point they would receive part of the funds, incentivizing reducing deficits and debts over the long run.

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    9 views1 page

    Solving EU Debt Crisis

    Uploaded by

    anon_923889721
    European politicians have been struggling for over a year to solve the European debt crisis. They blame speculators for destabilizing bonds and the monetary union, yet also claim European debt is safe. The EFSF that politicians established is unlikely to achieve stability. If another banking crisis occurred, who would guarantee the EFSF when all countries need money? The document proposes a simple stabilization mechanism where each country pays a tax based on its budget deficit and national debt. The tax revenue would accumulate until countries have a surplus, at which point they would receive part of the funds, incentivizing reducing deficits and debts over the long run.

    Copyright:

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    Solving the European debt crisis

    Joshi Takahashi (joshitakahashi@web.de) 1. Oktober 2011

    1 What are they doing?


    European politicians have been trying to solve the debt crisis for one and a half year now. As always politicians look for a boogy man. They think some evil guys are speculating in their bonds and destroy the monetary union. On the other hand they promise that European debt is safe. So I ask: Why then speculate? What politicians call EFSF (European Financial Stability Facility) is probably not the right thing for stabilization. Governments implemented a vicious circle because if all countries are in need of money (think of another banking crisis) who will guarantee for the ESFS?

    2 Simple stabilization mechanism


    What about a simple rule? Just internalize the external eects of debt in a monetary union. Every country pays a tax tc :
    tc = db + dn c c db , dn < 0 c c

    (1)

    where db is the budget decit and dn national debt of a certain country. and are c c positive values that measure the tax (maybe = 0.01 and = 0.001). The revenue from the tax is accumulated until one or more countries have a budget surplus. They get:
    1 sc = p
    17

    tc
    c=1

    (2)

    Where p is the number of countries having a budget surplus. Some might say this is not fair because countries having high debt levels have to pay even more. Well, fairness is not a concept of economics. Economically is possibly all right, stable countries get equivalent of the negative external eects. Overall it is best for the whole union because in the long-run where will be no decits (and no debts?) any more.

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