The economic solution to Europe's difficulties is simple. It's the political solution that is the problem. As Chris Dillow explains:
There is, in principle, a simple solution to it - to convert risky assets into safe ones. This could be done by beefing up the European Financial Stability Facility. It could then issue more of its own bonds - which have a AAA rating as they are guaranteed by the French and German governments - and buy PIGS debt. This would replace low-quality bonds which investors don't want with high-quality bonds which they do want.So a choice between penury or sovereignty.
...the problem with what I'm suggesting lies elsewhere. Such a move would represent a massive step towards fiscal union. It would mean that, in effect, northern European governments would guarantee the debts of southern ones, and in exchange for this they would demand limits upon how much they could borrow, as federal governments around the world limit states' borrowing. This would represent a huge loss of sovereignty.
Still, at least we have a choice right now, though that might not last if a Credit-Anstalt moment comes our way. Notes Dan O'Brien:
This August, there are legitimate fears that many governments in the rich world will not be able to fund themselves, leading to outcomes of potentially Armageddon-like proportions which could alter peoples lives more dramatically than any single event in many decades.I must get a comfortable pair of walking shoes...