The Eurozone Still Faces Several Challenges

June 25, 2012 by Marshall Auerback

European financial officials are preparing their policy package to deal with the current crisis for the meeting scheduled next week. It is not clear whether any of the proposals will be able to stop the ongoing bank run.  Here are some of the rumored proposals:

* Euro members jointly issue short term bills – in effect, short term euro bonds.
* A debt redemption fund as proposed by economic advisors to Merkel.
* New procedures for euro area banking supervision.
* Using the ESM to purchase peripheral nations’ bonds in order to reduce their sovereign interest rates.

French President Hollande is advocating the ESM purchase program. He is also advocating that the ESM be given a banking licence linked to the European Central Bank’s balance sheet. This makes sense as it addresses the solvency issue.

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