16 Nov 2011

Speculative Attacks within or outside a Monetary Union

Default versus Inflation (what to do today)

Daniel Gros

0
Download Publication

3236 Downloads

In this analytical policy brief, CEPS Director Daniel Gros explores whether there is a fundamental difference between a formal sovereign default with a haircut and debt monetisation, which reduces the purchasing power for investors by the same amount. He argues that there is indeed a difference because a formal sovereign default invariably leads to a banking crisis. Moreover, within a monetary union a sovereign is more exposed to liquidity problems than a country with an independent currency and any of its problems quickly spill over into the banking system, which cannot survive without a reliable source of liquidity given that banks are by nature highly leveraged institutions.

In terms of policy prescriptions, one conclusion is that less effort and financing should be devoted to trying to lower yields on peripheral government debt, but a lender of last resort is needed for both sovereigns and the banks. Another policy priority should be to stabilise the banking system in such a way that it can survive even if government debt yields increase.

Related Publications

Browse through the list of related publications.

The European added value of the Recovery and Resilience Facility

An assessment of the Austrian, Belgian and German plans

Where the (euro) buck stops

Facing the next big crisis with a better EU budget

The Next Revision of the Financial Regulation and the EU Budget Galaxy

How to safeguard and strengthen budgetary principles and parliamentary oversight

Optimal tariff versus optimal sanction

The case of European gas imports from Russia

Comparing and assessing recovery and resilience plans – Second edition

Italy, Germany, Spain, France, Portugal, Slovakia, Austria and Belgium

When the taps are turned off

How to get Europe through the next winter without Russian gas