Financial markets are driving the world towards another Great Depression. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.

Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common Treasury for the eurozone. In the meantime, the main banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct banks to maintain credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance themselves within limits at a very low cost. This would calm markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.

This is how it would work. Since a eurozone treaty establishing a common Treasury would take a long time to conclude, in the interim the member states have to appeal to the ECB to fill the vacuum. The European financial stabilisation facility (EFSF) is still being formed but in its present form the new common Treasury is only a source of funds. How the funds are spent is left to the member states. It would require a new intergovernmental agency to enable the EFSF to co-operate with Europe’s central bank. This would have to be authorised by the Bundestag and perhaps other legislatures.