Sargent’s history lesson for Europe

Tom Sargent’s op ed in the WSJ is a slimmed down version of his nobel paper. Both are worth the effort, but the op ed is more focused.

Tom’s bottom line for Europe: fiscal rules are the solution, and default may be the bridge that must be crossed to save the EUR. An act of fortitude and courage is required to demonstrate the will over-come the moral hazard problem due to the union’s faulty construction.

The world will not end if Greece defaults. A successful ‘deal’ means losses of ~70% on the bonds, so there really is not all that much (direct) difference between a deal and a default.

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