Archive for February 17, 2012

The Purpose of the Eurozone’s Can Kicking

February 17, 2012 Leave a comment

As this blog has maintained for some time, the eurozone has been engaged in a long, steady process of kicking the can down the road. Why’s that good and appropriate? One, it gives institutions like the ECB time to come up with stuff like the Long Term Refinancing Option (LTRO), which was a powerfully positive mechanism for the feared insolvent European banks, and for sovereign debt markets by extension. Also, this process is almost wholly political, which means it takes a lot of time to work out solutions between so many nations; so, more time is a significant factor—you’re not going to get a new treaty in 30 days. Very importantly, it allows capital markets to adjust and price in expected outcomes without inciting panic—the importance of this can scarcely be overstated. Lastly, to the extent some of these sovereign and banking ills are simply not solvable long-term without true restructuring (fairly likely in some form or another), it’s good to kick the can down the road to a day the Eurozone is stronger than it is now and can sustain the impact.

Europe Better Prepared Should Greece Default: Schaeuble



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