Professor Costas Milas, Professor of Finance, University of Liverpool Management School
“As the Eurozone economy faces, according to estimates by the International Monetary Fund (IMF), a mild contraction of 0.3% in 2012 followed by anaemic growth of 0.7% in 2013, debt worries in Spain and Italy add pressure to their borrowing costs and threaten the very existence of the Eurozone fairytale.
There are two solutions to deal with the current crisis.
1. The European Central Bank (ECB) should rapidly implement a considerable program of government bonds purchases. In the current recessionary climate, the risk of inflation overshooting the (near) 2% target is extremely small. Therefore, the ECB should proceed with this form of “Quantitative Easing” which will allow time for the debt and recession-struck economies of Portugal, Italy, Greece and Spain (PIGS) to put forward all necessary structural reforms, regain their domestic competitiveness and restore fiscal prudence.
2. If Germany and the remaining core countries are not prepared to agree with the above, it is probably time for the PIGS to fly on their own. The PIGS should leave the Eurozone area at the very same time and form a union with its own currency and fiscal integration. The new currency should initially be depreciated by around 30% relative to the Euro.
Table 1: Tax burden in the PIGS and the OECD for single taxpayers at average earnings without children (as % of total labour costs), 2011. The tax burden is the sum of personal income tax and employee plus employer social security contributions together with any payroll tax less cash transfers, expressed as a percentage of labour costs. Source: OECD.
Tax burden (%)
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