Simple Solutions to address the Euro crisis.

1. Global Economic Crisis – Immediate Solutions
The turbulence we are going through is unprecedented in the world History. What
started as A financial institution failure, affected not only the leading financial
institutions in the world but also the major developed economic systems in the world
leading to a systemic failure.
Unlike in the past , when it had an impact on only a few countries and few asset
classes, this time, the crisis had its effect on almost all countries in the world and all
asset classes. The crisis had a contagion effect and spread far and wide without an
end in sight creating more and more uncertainties day by day.
When Government creates stimulus it goes to increase the government debt making
the government vulnerable to financial weakness. In a few cases , where there was a
government failure, investors have taken an hair cut in their investments. But in
General, Sovereign debt is supposed to be more trustworthy since Central Banks can
print money to lend it to the government when in need.
Governments in an effort to stop economic slide, tried many measures including
Monetary and Fiscal Stimulus but black swan events had overtaken the efforts of
governments. Many of the developed countries printed more money and tried to
stimulate the Economic Growth and reduce the unemployment. But it has gone into a
spiral. The only effect is the outstanding debts of governments are going up, their
credit rating is being downgraded and there was a lot of trust deficit between
governments.,Banks and investors.
Everybody is in a dilemma searching for solutions and immediate remedy. The
effective solutions are eluding the policy makers.
.
According to Classical Economics, Printing money is likely to increase the demand,
inflation and reduce the value of money. This is true in cases of countries where the
potential for high growth, high employment levels and low debt repayment needs
exist.
Economic History has proven that only a few countries at any point in time have high
economic growth rates and those who were growing at high rates for long periods of
time will see a decline in growth and potential for growth is almost negligible.
The developed countries which are affected by crisis today has less potential for
growth , less opportunities for providing additional employment and supply exceeding
demand levels for many of the product categories. The scope for stimulating the
domestic demand and increasing inflationary tendencies are limited.
The need for new money creation has to continue in these economies till they
achieve an economic balance but with a difference. The classical economic theories
were created when the world was very simple, the financial architecture in the

2. economies were very simple, the products available in the financial market were
very simple and transparent. The world was not integrated like today. The theories
proved right, whenever there was an economic crisis.
But we are living in a modern world with many factors influencing the economic
performance and it is very difficult to exactly quantify the impact of each factor on the
economy. The present crisis gives an impression that there is no solution in sight.
There is a fear, gloom and high level of uncertainty.
The crisis in Europe today is due to high level of government debt which was created
because of the high acceptance of debt denominated in Euro issued by member
countries. Only the Monetary union happened and to some extent economic
integration. There was a total absence of Fiscal Union and Political Union and lack
of full economic integration. There is a need to move towards a fiscal integration and
member countries should give the mandate to Germany and France to evolve a fiscal
system within Euro Zone as if it is a Federal Structure. The Fiscal union is the
immediate need.
The crisis today is due to Debt at Country Level , Province/State Level, Municipal
Level, Corporate level and individual level. All the players in the system are affected
but the degree of impact varies on each stake holder. Unlike in the past, it looks like
the issue could not be resolved within a short period.
One solution seems to be in sight, that is the way in which the debt levels
could be reduced for all stake holders. This could be achieved through creating
money by Government without adding debt to its balance sheet. That is to just print
money and allocate to all the Stakeholders based on criteria to be evolved which will
ensure the viability of the macro economic system, banking system, corporate sector
and individuals who are indebted. The amount of money to be created depends on
the need of all the stakeholders. It could be capped at 25% of the money in
circulation today. This strategy might require, control of inflation within specified
levels and managing the currency exchange rate within a specified levels. Since the
actions taken in one country will have impact on all other countries in the world there
has to be a coordinated action which is facilitated through a body like IMF. This
strategy will change how Economic systems function, Capital markets work and
transmission of money takes place. How this system will work can be tested through
applying this concept to the most affected country in the world today and see the
results in six months and if after effects are manageable then this concept could be
implemented in other countries.
Introducing this system will make the economic systems viable. Improve the liquidity,
bring back the trust levels. , removing the gloom and doom and make the financial
systems functional. Today, financial systems are in a limbo and their traditional roles
in financial sector have been totally hampered . The employment levels will go up.
Adopting the above strategy might require a close coordination of Fiscal and
Monetary functions in a country and both Fiscal and Monetary policies have to be
developed in an integrated manner. There has to be an increased integration

3. between all the regulators in a country and continuous exchange of information on
the developments in each domain.
The Analysis to be done and the parameters to be tracked.
Analysis of Debt with the average maturity period of the debt with Aging profile.
At the Country Level
State/Province Level
City/Municipal Level
Corporate Debt
Individual debt.
Criteria for determining the Printing of Money without Creating Debt for the
Government
Total Debt in the system / GDP
Government Debt / GDP
External Debt / GDP
Repayments/ GDP
External Repayments / Reserves.
Forex Reserves / Negative Balance
Budget Deficit
Current Account Deficit
GDP Growth Rate /Potential Growth rate for next 5 years.
Interest Rates
Inflation and the likely trend in 5 years.
Unemployment level. and the likely trend in 5 years.
Distribution of Money Created.
The end use of money created should go to reduce the debt levels of stake holders
including investment in Equity capital . The government can invest in Equity capital of
Banks and Companies. Whenever governments had given stimulus in the form of
investments in shares of companies, when there was a boom , governments were
able to exit the investments at good profits.
There has to be a careful deployment of the money created and as per the criteria to
be developed in consultation with a body like IMF, World Bank.
These are my initial thoughts and this concept could be further refined and modified
after discussions and debates. Hope adopting this approach would help to address
the issues before the world leaders in the Short term.
R.Kannan
www.indiaat10.blogspot.com
6th December 2011