A combination of more pragmatic and pro-growth policies can be more effective in calming the market, allowing the crisis countries to gradually raise their growth rates over time, which is the only proven way historically for highly indebted countries to deleverage successfully.

Pragmatism means, however, that the European Central Bank (ECB) will have to act proactively as a lender of the last resort; and the troika will have to selectively tone down austerity, even allowing some increase in government spending in areas that improve the economy’s efficiency and competitiveness, and to let the euro exchange rate fall much further. This amounts to recasting the future of the Euro Zone with a focus on growth instead of attempting to preserve the status quo of the monetary union.

1. “The Debt-Deflation Theory of the Great Depression,” Irving Fisher, 1933, Econometria