I have a three-part series on Europe’s looming fiscal collapse (see here, here, and here).

Based on this data from Robin Brooks, the crisis will likely start in France (it’s a bad sign when the light blue line is above the dark line).

So what should be done about this seemingly inevitable fiscal crisis?

The easy answer is not to repeat the mistakes of the past. More specifically, don’t bail out profligate governments.

No bailouts from the IMF. No bailouts from Brussels. And no bailouts from the European Central Bank (ECB).

As I wrote about Greece back in 2010, I think bankruptcy and default is a preferable approach.

And, back in 2018, when I speculated that Italy would be the first debt domino, one of my recommendations was a no-bailout policy.

The European Commission (and, more importantly, the European Central Bank) henceforth will have a no-bailout policy for national governments, or for those who lend to national governments.

It’s not that default is desirable. But at least if a country like Italy fails to pay bondholders, the people who foolishly lent money to the Italian government get punished for their bad choices.

More important, it would send a signal to other governments that they also won’t get bailouts. And that means that politicians in those countries presumably will be more responsible.

And it will definitely be true that investors will be much less like to lend money to profligate governments, so deficit spending will probably decline.

Simply stated, my goal is to reduce moral hazard. I disapprove when politicians impose a policy that increases the likelihood of a bad outcome (as explained in this video).

Robin Brooks has the same outlook. Here are excerpts from his recent column.

Government bond yields in France are spiraling out of control. Contagion to the rest of high-debt Europe is unfolding rapidly. There can be absolutely no suspense on how this ends. The ECB will intervene… While France should have gotten its budget under control a long time ago, politicians just respond to incentives. In the Euro zone, those are that the ECB will bail you out when sovereign debt comes under stress… Northern Europe needs to end this farce. That starts with prohibiting the ECB from being active in bond markets. That’ll be a battle and it’ll be messy. But it’s the only way to guarantee the long-term survival of the Euro. …you need fiscal defaults in high-debt countries, not artificial avoidance of them. …The incentives the ECB has set are that it’ll bail people out when they’re in trouble and that it’ll invent all kinds of word salad – like “financial fragmentation” – to justify this. This all starts and ends with the ECB. Germany and other Northern European countries need to accept the fact that the ECB needs to be prohibited from operating in sovereign debt markets. That’ll cause defaults and will be bumpy. But it’s the only way to guarantee long-term survival of the single currency.

For what it’s worth, I issued the same warning back in 2011.

Sadly, the current head of the ECB is both incompetent and statist, so I’m not very hopeful for a good outcome.

P.S. While the European Central Bank has a bad track record, let’s not overlook the pernicious role of the International Monetary Fund. If we want to stop bailouts, we have to worry about both the ECB and IMF.