Echoes of the Modest Proposal begin to reverberate in Germany

15/12/2010 by

An article of immense importance appeared in the Financial Times yesterday, 14th December 2010. Effectively, it signalled a split in the country’s hitherto united front on its vision of the eurozone. Its social democrat authors, Frank-Walter Steinmeier (Germany’s Foreign Minister, 2005-9) and Peer Steinbrück (Germany’s Finance Minister, 2005-9), pinned their colours on the mast of a solution to the crisis that resonates nicely with our Modest Proposal. Selected extracts from the article follow, as well as brief comments:

“The time for stumbling through the euro crisis is over. Piecemeal approaches and wait-and-see attitudes are endangering European integration… The required solution is a combination of a haircut for debt holders, debt guarantees for stable countries and the limited introduction of European-wide bonds in the medium term, accompanied by more aligned fiscal policies. These measures would only work together; none alone would restore stability.”

In particular, the authors recommend:

  1. A haircut for holders of Greek, Irish, and Portuguese debt. “Painful spending cuts and structural reforms alone – of an extent unheard of in modern economic history – will not allow them to escape their debt trap. In the interest of all of Europe, we need to restructure their debt.”
  2. A guarantee of the entire outstanding eurozone debt of stable countries using the issue of eurobonds as a signal of Europe’s resolve to end the domino effect – “although to avoid any moral hazard they should cover only a limited share of public debt”.

The two suggestions above, 1 and 2, correspond to two of the three recommendations of the Modest Proposal.

Suggestion 1 is now turning (from a wildly radical idea) into conventional wisdom. Our recommendation of a Tripartite Agreement (between the ECB, indebted member-states and Europe’s banks) offers a tangible means of achieving eclectic haircuts by banks dependent on ECB financing. The difference with the Modest Proposal is that we deem it essential that the haircuts are (a) negotiated and (b) extend to the sovereign debts of Spain, Italy and Belgium.

Suggestion 2 is also in concert with our idea of a tranche transfer of existing member-state bonds to the ECB to the tune of bonds equal in value to 60% of member-states’ GDP. What I would we have liked to see is that the authors explicitly state that these eurobonds, unlike the bonds under issue currently by the EFSF, become the liability of the ECB and not of the EU’s member states. See here and here why.

So, Germany, at least its leading opposition figures, is undergoing the Gestalt Shift necessary (see Europe Needs a Gestalt Shift). Our only concern is that (a) it is taking too long for Germany’s political system to respond to a clear and present danger of the euro’s disintegration, and (b) that the Steinmeier-Steinbrück FT article is missing the third plank of the Modest Proposal: a clear plan for kick-starting investment and, therefore, the recovery. Our suggestion in the Modest Proposal is to energise the European Investment Bank. Germany, of all countries, must recognise the importance of a new Marshall Plan for Europe (given that its own postwar miracle would have been impossible without it) as a permanent way out of the current quagmire.


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