Citibank is hardly the last bastion of radical socialism. So, when their chief economist comes out with (to many of us blithering obvious) statements such as
perverse feedback loops between fiscally weak sovereigns and (near) insolvent banks, financial repression – governments stuffing the banks in their jurisdiction with sovereign debt they have trouble selling
advanced economies have socialised financial-sector losses caused by the crisis.
Even though austerity in the periphery and in some of the highly indebted core countries (the Netherlands, Belgium) has reduced the deficits of most governments, more austerity will be required to reduce the deficits to sustainable levels in most countries, unless something is done to solve the stock overhang problem.
Growth will not come to the rescue. A cyclical recovery would require a much more expansionary ECB monetary policy, the use of fiscal stimuli in those countries that have excessive external surpluses (especially Germany), and market access for the sovereign on attractive terms.
For political/monetary ideological reasons, a monetary-fiscal stimulus in the Eurozone is highly unlikely, regardless of how desirable it may be from the perspective of economic activity. Potential output growth is now estimated by the ECB to be no more than 0.5%. Although ageing, low investment, and disappointing total factor productivity growth are undoubtedly having a negative impact on potential output growth in the Eurozone, the 0.5% estimate is unduly pessimistic.
The sovereign debt stock problem remains. Although the Eurozone political leadership has gone on record as saying that there will be no more sovereign debt restructuring involving private holders of sovereign debt after Greece (give or take Cyprus), all options to deal with the sovereign debt overhang should remain on the table.
Debt restructuring for highly indebted sovereigns in the Eurozone (through maturity extensions, coupon cuts, interest deferrals, debt exchanges involving present-value haircuts, or through face-value haircuts), should be on a menu that also includes partial public debt mutualisation (burden-sharing by the core). Such public debt mutualisation can be done either through the front door (through explicitly mutualised fiscal facilities such as the European Stability Mechanism) or through the back door (by the ECB purchasing the debt of excessively indebted sovereigns and accepting net-present-value losses or face-value losses on these purchases, up to complete cancellation of the debt involved). Another possible way of addressing a public debt overhang without multi-year demand-destroying fiscal austerity would be a one-off wealth levy.
Then we need to think hard. Watch the mainstream media ignore this, watch the bond chorus swing into action to decry it.