In an article titled “A viable architecture for the Eurozone” and published in Kathimerini on 25 September 2011, Dimitri Vayanos argues that while Greece’s economic crisis is due to a large extent to deep structural problems within the Greek economy, the crisis’ suddenness and severity are also due to design flaws of the Eurozone. These flaws have to do mainly with the rules under which the Eurozone’s banking system operates. In particular, (a) sovereign debt is treated as riskfree for the purposes of bank regulation, and (b) banks are regulated at the national rather than at the European level. Because of (a) and (b), countries with weak fiscal discipline, such as Greece, were able to borrow large amounts, and their banking system was heavily exposed to domestic bonds. As a consequence, solvency problems of these countries spilled over to the countries’ banks. And conversely, solvency problems of the banks fed back to the countries, e.g., through the need to provide deposit insurance, worsening even further the countries’ fiscal situation. Fixing (a) and (b) will result in a more stable Eurozone, without the need for a fiscal union and Eurobonds, which are not politically feasible at this time.
The Kathimerini article is available here. The article builds on work done by the Euro-nomics group composed of nine European academic economists: Markus Brunnermeier, Luis Garicano, Philip R. Lane, Marco Pagano, Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh and Dimitri Vayanos. The group’s objective is to provide concrete, carefully considered, and politically feasible ideas to address the serious problems currently faced by the Eurozone. You can check out the group’s first proposal, on European Safe Bonds, or ESBies, here.