Since the Euro crisis is rooted in current account imbalances, this could be corrected by a German [by 'German', I refer to all the non-crisis European countries, or more specifically those with a trade surplus, by 'European' I mean 'Eurozone'] tax credit, provided by the German government, for its citizens to purchase goods from southern Europe. It would be funded by the German government printing Euros. In other words, Germany would enact a 'reverse tariff' on goods from southern Europe, with the aim of correcting its imbalances with them. I contend that this is a win-win situation on the national levels.
First consider the German situation, since its government would have to enact this. By funding the tax credit by printing Euros, it is essentially funding it through a seignorage tax on the rest of Europe. Since he newly minted Euros are controlled by Germany, while the cost to the value of the Euro is spread across the Eurozone. But this is Just, since Germany is bailing out the rest of Europe with its debt, the rest of Europe cannot complain about German seignorage tax. Further seignorage tax will not cost Germany anything in its fiscal budget position or debt outstanding.
However why should Germany favor imports from specific countries through the tax credit? Simple: if the Euro crisis is not resolved, these countries will default and Germany will never be repaid in its hundreds of billions, perhaps trillions of euros that it is owed. Germany has a strong national interest in being repaid, and hence it has a national interest in seeing these countries earn income through exports. Germany's interest is better served by the import of an appliance from Spain than by the import of an appliance from China, because the proceeds of the sale from the Spanish appliance will in part be used to repay Germany itself, while the proceeds of the sale of the Chinese appliance will not. This value difference is not captured in prices of the respective appliances, and therefore from the German perspective, the tax credit really deals with an
externality that creates a flaw in the market price.
Now consider this from the perspective of the southern European countries. This one is very simple- They have been urging the ECB to take quantitative action for some time now, so they should not object to Germany printing. They should also not object to being favored with a reverse tariff, since all it means is greater demand for their labor. The only real cost to these countries is that some of the unemployed labor and capital will have to exit from its idling state and get to work for Germany.
The real advantage here is that there is no moral hazard - a bigger reverse tariff does not make it any easier for Spain to deficit spend. Instead, the opposite - if Spain wants to get out from under the seignorage tax imposed by Germany, it must increase its competitiveness quickly so that the reverse tariff is no longer needed. Instead of moral hazard, moral virtue is created.
Regardless of how this crisis ends, or where one stands on fiscal union, it is clear that in any sort of currency union some method will have to be found of addressing imbalances between the union members without the highly uncertain and destructive wage deflation / austerity practices we have seen. I propose the 'reverse tariff' as such a mechanism.
