"the decade-long accumulation of public debt"For most of the last decade, Italy, Spain and Ireland have run surpluses and have seen their yields skyrocket. Germany, meanwhile, has run deficits the entire time and has seen its yields drop significantly.
"we need a clear-cut strategy for competitiveness and growth."
Start putting holes in condoms and sub in sugar pills for birth control pills. The reason Europe's growth prospects look so dim is that Europe is aging rapidly. Indeed, the European population is about to shrink at a rate not seen since the Black Death. Couple that with the ten of millions of Europeans retiring on reduced pensions and you have the makings of Japan style liquidity trap. Of course, the economic downturn is likely to make the situation even worse. People tend to have less kids in economic hard times. Europe is a highly competitive rapidly shrinking market, with high labour costs and last but not least frigid credit markets. All that being said, if you are a maker of adult diapers, then Europe is where you want to be.
"Putting the European Central Bank’s printing presses to work might at best bring some short-term relief. But it would have dire consequences, both raising inflation and dissipating vitally important incentives for reform."
The UK and US have been doing what Japan has done for years and there is no evidence, notwithstanding the UK's increase in the VAT, that such measures have led a high rate of inflation. Indeed, with regard to interest rates, Bernanke has looked further and further out in order to stimulate moderate inflation and still the specter of deflation hangs over the US economy. The US economy's long term growth prospects are much better than Europe's. The US adds more and more people every year. Europe looses more and more people every year.
The printing press is the only way Europe can stave off an Italian default and a catastrophic credit crisis. Moreover, all available evidence suggests that even a major intervention by ECB would not lead to stampeding inflation. As Krugman noted with regard to Japan, "printing money is only inflationary if people spend it, and if that spending exceeds the economy's capacity to produce." http://web.mit.edu/krugman/www/nikkei.html Given personal debt levels in countries where there were real estate bubbles, Europe's aforementioned shrinking and rapidly aging population, and the massive excess capacity in Europe and indeed the whole Western world, spending is likely going to be quite subdued and certainly nothing that would strain current productive capacity.
Finally, if there is any inflation it will be Europe's core economies, principally Germany, and far from being a bad thing, inflation there is precisely the kind of relief the periphery needs right now. The higher the rate of inflation in Europe's core the less Europe's periphery will need to rely on deflation to become competitive.
"depreciated currency"Is the foreign minister of one of the most successful export lead economies in the Western world seriously bemoaning the prospect of a drop in his country's currency? Just checking.
"Greece's government must without further delay adopt and implement the necessary reforms."
Forcing a country, that is in immediate danger of default, to enact policies that lead to skyrocketing unemployment and downward pressure on wages is not going to forestall Greece from defaulting. No, it makes it all but certain that Greece will default and leave the Euro. Deflationary austerity might make Greece more competitive in the long term, but the debt crisis is now. Deflation considerably increases Greece's debt burden.
"states and banks need protection from contagion."
I agree. Signal that the ECB will keep Italian and Spanish yields below 6 and have them stop sterilizing those bond purchases.