Self-fulfilling economic predictions

Great Power Mathew Yglesias is at it again delivering reason to the prevaricating milquetoasts that make up the class of European policymakers.

Instead of idling in diplomatic motorcades and allowing speculators to continuously attack the ability of the Italian government to repay the interest on its debt, EU policymakers could look at Italy’s relatively sound primary budget (which ignores interest owed on debt and, in the case of Italy, sits in surplus) and work with the ECB (and perhaps the IMF and other institutions) to re-instill faith in the Italian bond market. According to Yglesias:

If you assume the existence of an Italian government with a good-faith desire for debt reduction and a central bank with confidence in the Italian government, you have an eminently solvable problem here. The government agrees to keep budgeting for a primary surplus of such-and-such and the European Central Bank agrees to keep rates down to such-and-such and it’s off to the races.

Karl Smith writesthat although there are certain legislative hurdles to this within the existing European treaty framework, some improvisational skill could probably get it done. He brings up various treaty provisions and argues:

Lester Young

The first provision says that the ECB cannot target a price for Italian Debt on the secondary market…The second provision says that ECB cannot guarantee that newly issued Italian debt will stand as collateral under repurchase agreements…If the ECB were able to do either of the above things then it could provide guaranteed liquidity to the holders of Italian debt and cause the yield to collapse towards the overnight rate.

It would seem that with more and more technocrats assuming positions of political, legislative and economic authority in the EU, tweaking treaty provisions and actually getting things back on track is not such an outlandish idea. Whether and how it actually happens is what we’re all waiting to find out.

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