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The European Central Bank's job is to ensure nominal stability in the Eurozone economy. The ECB should not bail out governments and banks.
Unfortunately again and again over the past six years the ECB has been forced to bail out Eurozone states. Hence, the ECB has repeatedly conducted credit policy (rather than monetary policy) to avoid Eurozone countries defaulting.
The ECB itself is largely to blame for this because it has kept monetary conditions far too tight. However, it has been under tremendous pressure to bail out nations and banks rather than conduct sound monetary policies.
By linking Greece's EU and ECB debts to Greek nominal GDP, as Varoufakis has suggested, Greece's public finances would be less vulnerable to monetary policy failure in the Eurozone.
The Chancellor George Osborne should be an enthusiastic supporter of Varoufakis’s debt plan as it would cut the cost of the ECB's tight money policies and reduce the danger of another major Eurozone crisis.
Notes to editors:
For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at firstname.lastname@example.org / 07584 778207.
The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.