Why didn't Europe's governments coordinate a sensible fiscal policy? The answer is that some countries- like Greece- weren't sensible at all. You can't coordinate anything with a crazy person. Furthermore, other some other countries were politically dysfunctional- there was deep popular anger at nepotistic elites- and thus followed a path of technocratic least resistance or 'kicking the can down the road'.



Europe failed to anticipate that labour would be more mobile than capital and that the new 'knowledge based' industries would have different types of scale and scope economies. Furthermore, some countries misallocated resources towards construction which caused significant structural unemployment and capacity underutilization. In other cases there was reluctance to do large scale infrastructure renewal because of increased compliance costs and reduced Public Sector administrative capacity. Speaking generally, 'Green' panaceas were touted by people who should have known better. Thus, Government spending could have a negative multiplier effect quite independent of any 'crowding out'. This is why fiscal policy was ineffective.



It is by no means a settled matter that Lagarde will be a roi faineant. France has a different political culture and probably can spearhead infrastructure and defense projects with a positive return.



Under a new administration, Greece may yet turn the corner like Portugal while, sooner or later, the Italians too will find a way forward. There is no reason to believe that the EU is bound to repeat its past mistakes. The rise of China has concentrated minds. European countries are now more ready to reduce administrative hurdles and other compliance costs while increasing the efficiency of big Investment projects thanks to learning effects and second mover advantage.



The ECB does need reform, but not a 'new weapon' that will blow up in its face. The first requisite is that the meaning of 'price stability' is clarified, in accordance with economic theory and practice, such that its inherent multiple realizability allows the pursuit of efficiency. This will be much easier now thanks to Draghi's spadework.



Moral hazard can be directly tackled by better screening- i.e regulation. This is scarcely controversial. The crisis has long passed and there is no contagion risk from a judicial approach.



'Copper bottomed safe assets' don't exist. However, as a matter of convention, there is a sufficiency of candidates within the zone and thus this is merely a question of leadership and coordination. There is no reason to believe that Europe will continue to cut off its own nose in the context of a rising China and a more distant U.S.



In the Eurozone treaties no distinction is made between Maastricht compliant and non compliant debt. The rule is against any 'monetary financing' by the ECB. To bring the thing in by the back door, apart from being illegal, is to restore two different types of moral hazard. The first is that GNP will be overstated and the second is that naughty countries will use any ECB windfall to distort secondary markets- in other words, fraud will once again be the way to go.



Varoufakis says ' if a member state’s debt-to-GDP ratio is 90%, the ECB conversion bond services €667 of each €1,000 of maturing state debt. The less the member state has exceeded its Maastricht debt limit, the larger the percentage of its public debt that will be serviced at the ultra-low ECB bond yields.' So, first the Govt. artificially boosts its GDP to get more 'free money' and then it uses it to monkey around in secondary markets. No doubt, plenty of apparatchiks get rich in the process but the bubble soon bursts. The ECB is now in the 'monetary financing' business in defiance of Eurozone treaties and so Europe goes to the dogs. Varoufakis, with his usual wit, describes the bonds the ECB now holds as 'safe assets'! No doubt 'green bonds' too are very safe. Indeed, they grow on trees!



Varoufakis does not understand what was at the root of Greek's problems- viz. telling lies about GDP and monkeying around in secondary markets. He remains convinced that the real story is about Nazi 'banks rather than tanks' which suddenly appeared in the streets of Athens to impose the rule of some 'Troika' of evildoers. Hopefully, now Greece has a new Government, it will begin to reclaim its natural place as a Knowledge and Trade Hub for a very vibrant and dynamic region of the world.