3 key mistakes the ECB made on Greece

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Even as Dominique Strauss-Kahn is trending on twitter and @faisalislam live tweets the Euro-crisis talks, an article by Jeffrey Frankel on Vox pinpoints the three reasons where the ECB failed on Greece:

  • Mistake #1: The decision in 2000 to admit Greece in the Eurozone.
  • Mistake #2: Allowing the interest rate spreads on sovereign bonds issued by Greece (and other periphery countries) to fall almost to zero during the period 2002-2007.
  • Mistake #3: The failure to send Greece to the IMF early in the crisis.

The solution?

  • The Eurozone should adopt a rule that whenever a country violates the fiscal criterion of the Pact (say, a budget deficit in excess of 3% of GDP, structurally adjusted), the ECB must stop accepting that government's debt as collateral.

That's a fairly harsh punishment and would be severe enough to scare any would-be profligates straight.

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