The Economist never fails to take the most conventional position. Of course it is against the bail-outs, and it is also against uncontrolled default.
“There is an alternative, for which this newspaper has long argued: an orderly restructuring of Greece’s debts, halving their value to around 80% of GDP.”
Their justification for their plan is that “at least Greece and the markets would have a plan with a chance of working.”
Now, a sure sign of desperation is when your main justification for Plan A is that it has “a chance of working.”
Of course, an ‘orderly restructuring’ is no solution, it is just the middle position between the two extremes of no default and total default. It might have the advantages of each, but it also has the disadvantages of each. And likely, the markets would see a partial default as only a precursor for a full default, squeezing Greece even more and setting up the stage for a full default, which “would be ruinous”, according to the Economist. I tend to agree on this point — Barry Eichengreen explains why.
So what is to be done? Well, despite what the Economist says, there is yet another option which is not being discussed– the use of seignorage, or printing of money, by central European authorities to buy up distressed peripheral government securities. Usually authorities shy away from this for obvious reasons, but in this case, it’s arguably the least costly option to all involved.
The advantages of this plan include (1) It would definitely work– it gives the authorities nearly unlimited power. (2) It wouldn’t result in much drop in the value of the euro, because any downward pressure on the price of the euro due to there being a greater supply of euros would be counterbalanced by upward pressure on the price of the euro due to the easing of the crisis. (3) It would allow European authorities to calibrate their response, keeping just the amount of pressure they want on the PIIGS to keep the momentum for reform going but avoiding default.