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To: ChanceIs who wrote (156761)	9/9/2011 6:29:14 PM
From: Dennis Roth	Read Replies (1) of 206104

FWIW, Global Economics View The future of the euro area: fiscal union, break-up or blundering towards a ‘you break it you own it Europe’ 9 September 2011 ¦ 56 pages citigroupgeo.com Conventional wisdom suggests that there are only two possible destinations for the euro area: fiscal union or break-up. We suggest a third alternative as the most likely eventual outcome: ‘You Break it, You Own it Europe’ (YBIYOIE). Fiscal federalism, ‘Transfer Europe’ and uncapped issuance of E-bonds are out of the question for political reasons. An EA break-up would be very costly, particularly for weaker, uncompetitive EA countries exiting or left behind – and remains highly unlikely, in our view. YBIYOIE consists of the minimum institutional, fiscal and regulatory set-up to ensure survival of the EA, including: – i) Large enough liquidity facilities to prevent illiquid but solvent EA sovereigns and banks from being forced into default by a loss of market access. – ii) A debt restructuring mechanism for insolvent EA sovereigns. – iii) A special resolution regime for EU banks and a Euro-Tarp for cross-border sibanks and other sifis. Resolution of the current crises will likely involve some measure of ‘Transfer Europe’, including bail-outs by the ECB and limited issuance of E-bonds for specific purposes. This is the price of fundamental design defects in the original monetary union. But even the resolution of the current crisis will contain significant elements of YBIYOIE, notably private sector burden sharing in the near-inevitable debt restructurings of insolvent EA sovereigns and EU banks. Neither elected policymakers nor the ECB have behaved proactively. Both are likely to continue to disappoint repeatedly. But the EA has the institutional and political capacity to deal eventually with the current crises and to make the necessary reforms to ensure its long-term survival.

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