News of the day: “Prime Minister David Cameron and US president Barack Obama have agreed on the need for “an immediate plan” to resolve the eurozone crisis, Downing Street said today.”
Duncan Black is skeptical, citing the above Venn Diagram. And in practice of course he’s correct. What’s happened here is that David Cameron doesn’t know how to fix the UK’s cyclical economic problems, and even if Barack Obama does know (which I’m not sure of) he’s stranded himself in a situation where he lacks the political or institutional capacity to get it done*. So it’s convenient for both leaders to point to the eurozone as the source of probelms and urge Angela Merkel to fix things.
But I don’t see why, in principle, foreign intervention couldn’t save the day. The Fed and the Bank of England would need to declare currency war on the eurozone and engage in massive purchases of euros. If the ECB just sat back and relaxed, that would make Europe’s problems even worse. But the most likely scenario would be massive retaliation by the ECB and much-needed transatlantic monetary stimulus. Of course it’s true that this solution counts on the ECB reacting in a non-insane manner, which has only occasionally been a good betting strategy. But I think it would work. Central banks, for whatever reason, are much happier to talk about exchange rate issues than about generalized monetary crunches.
* (with the important exception of the platinum coin option, which would be a kind of constitutional hardball that Obama’s never seemed interested in playing)