If you’re going to have one central bank, you need a vehicle other than monetary policy to relieve regional disparities.
[Making] the euro work is more feasible than I used to think. True American-style labor market integration isn’t…going to happen. But more fiscal integration could.
Now let’s see how long it takes them to admit my other conclusion:
You need to design the system so it has time to adapt to isolated changes without a negative ripple effect.
Economists Oliver Hart and Luigi Zingales have proposed a regulatory system that anticipates banks’ distress based on their credit default swap prices and restructures their debt before bondholders are in panic mode. In 2001, U.S. Treasury Secretary Paul O’Neill proposed an international bankruptcy court that could serve the same purpose for sovereign debt.
The global economy is wound pretty tightly these days. Maybe it’s time to make it a little safer for the occasional error.