Saviour of Last Resort: The Modest Proposal as the Eurozone’s last line of defence

In his pivotal article in yesterday’s Financial Times, Martin Wolf put the matter starkly: “The eurozone, as designed, has failed.” Paul Krugman quickly added this chilling allegory to Wolf’s detailed argument: “If you ask me, the water level has now dropped so far that the fuel rods are exposed. We really are in meltdown territory.” In this post I argue that there is only one path left open to the eurozone for averting meltdown: A full implementation of the Modest Proposal (or something very close to it).

Wolf’s analysis, that led him to his bleak prognosis, is founded on a simple, clear, incontrovertible point (that was made before him by Hans-Werner Sinn): While our politicians are dithering, the European System of Central Banks (ESCB), of which the ECB is one component, is strained to the limit, coerced by the force of circumstance to do that which its charter has explicitly forbidden: To debt-finance the eurozone’s deficit member states (indirectly, of course).

The case is open and shut. In the absence of a common fiscal tool, and in a time of crisis, the monetary authorities are forced to enter the fray of fiscal policy. Moreover, the more underhanded and unspoken the ESCB’s dallying with fiscal policy is the less effective become both its monetary and its (covert) fiscal policy.  In particular, Central Banks of insolvent states (e.g. Ireland’s or Greece’s) lend to their nation’s insolvent banks (at about 1%) which, in turn, are replete with bonds issued by the insolvent states (not to mention that they are forced to keep acquiring new short term bonds from them!). And where does the Central Bank of Greece or Ireland find that money? They borrow it from the Central Banks of the solvent, surplus member-states (e.g. Germany’s, Holland’s etc.). Thus, the more the crisis proceeds the greater the mountain of monies owed, effectively, by the insolvent member-states to the Central Banks of the solvent member-states.

This is precisely why intelligent Central Bankers, like Lorenzo Bini Smaghi, scream blue murder every time someone mentions the words “Greek default” (or, euphemistically, “Greek restructuring” or “reprofiling”). Elsewhere I have referred to such fears as derivative of Europe’s Great Banking Conundrum. And what is the essence of this Conundrum?  It is that, on the one hand, the banking system cannot survive a major ‘default event’ while, at once, it cannot prevent it.

To sum up Wolf’s, Krugman’s, Sinn’s and Smaghi’s point of intellectual convergence, the strains that the ESCB labours under are gargantuan and escalating every day the crisis continues. Against this background, a default of any kind (not necessarily in Athens) will kickstart a catastrophic sequence of ‘events’ that will render the costs of salvaging the common currency (to the surplus member-states) prohibitive. At that point (as I have outlined here), the solvent member-states will simply bail themselves out, abandon the euro and proceed to set up their own currency or currencies. Unencumbered by the periphery, they will, subsequently, struggle to find ways of dealing with an impending massive recession caused by the loss of export markets (due the revaluation of their new currency/ies). (A note of caution: The fact that Germany managed well in the 1980s under an overvalued DM is not a good omen for the struggle it will have on its hands in today’s globally recessionary environment.) Meanwhile, the very notion of a United Europe will have met the same fate as that of the much lamented Weimar Republic…

Can a Greek default be averted?

Over the next few days and weeks, you will be hearing a great deal regarding the Greek Bail-Out Mk2. Its purpose? To succeed where Mk1 proved such a farcical failure. To turn a Greek default from a near-certainty to a low probability outcome, thus allowing a smidgeon of optimism that the eurozone would return to normalcy; to a situation where the money markets (as opposed to the tax payers) finance the member-states which cannot stand on their own two feet.

Do the European powers-that-be entertain real hope that Bail-Out Mk2 can succeed where Mk1 did not? What will they do differently this time? The answer they give is that, having learnt their lesson the hard way, this time they will take no chances with the Greek government. They will play hard ball in two crucial ways both of which violate the most basic principles of national sovereignty: First, the privatisation program (which is supposed to yield €50 billion by which to retire existing debt) will be carried out by non-Greek officials (who will presumably decided what to sell, the price and the way in which the proceeds will be utilised). Secondly, tax collection will be contracted out to non-Greek collectors.

Setting aside all objections regarding the feasibility and legality of these two draconian measures, let me ask a hard-nosed question: Supposing they do the trick, will these measures avert a Greek default? Not on your Nelly, is the striking answer.

Am I being too pessimistic? Not in the slightest dear reader. During the past few weeks I worked busily to set up a Crisis Monitor Unit on behalf of the Greek TUC (Trades Union Council or GSEE). In association with Dr Tasos Patokos, we have carried out a series of simulations regarding the Greek debt-to-GDP ratio under different scenaria. The findings are startling. Before presenting them here, let me explain that to map out properly the dynamic path of the debt-to-GDP ratio of any country, it is not enough to have data on aggregate debt. One needs a detailed repayments’ schedule, complete with annual bond maturities and official repayment dates/magnitudes. Fortunately, even though this information is not publically available, the necessary data found its way into our simulation.

Of course, every quantitative predictive model is as good as its assumptions. So, to explore this section’s pressing question, we decided to assume that the (grossly unrealistic) targets set by the EU and the Greek government will be met well and truly. Imagine our surprise when we discovered that, even under these official science-fiction-like presumptions, Greece’s debt-to-GDP ratio path remains explosive. Indeed, and this is crucial, the aggressive privatisation drive would make no difference to the probability of default.

In the preceding diagram, where the vertical axis represents Greece’s debt to GDP ratio, four scenaria are depicted:

Scenario 1 (the grey bars): Steady as she goes, with strict adherence to the EU-IMF targets

Scenario 2 (the yellow bars): As in Scenario 1 with the addition of a highly successful privatisation program worth €50 billion in aggregate which yields €15 billion in 2011, another €15 billion in 2012, and a further €10 billion each for 2013 and 2014. All these monies are used to retire debt.

Scenario 3 (the blue bars): The Modest Proposal adopted in part. In particular, we assume that Policies 1&2 are adopted but not Policy 3. In other words, we assume that a part of Greece’s debt is transferred onto the ECB’s books (which issues 20 year eurobonds to cover it) and that Greece repays that debt over the same span of time at no more than 3.3% (which is, in our estimation, above the ECB-bonds’ market rates). Further, we assume that the stressed banks are recapitalised and accept, in exchange for EFSF capital, selective haircuts. Policy 3 (the use of eurobonds to energise the European Investment Bank) is however not adopted, under Scenario 3.

Scenario 4 (the pink bars): The Modest Proposal fully fledged. Policy 3 is also activated with the European Investment Bank carrying out investments within Greece to the tune of 0,9% of Greek GDP (and assuming a very modest multiplier of no more than 2).

The diagram speaks volumes.[1] The first thing to notice is that the privatisation program is irrelevant. The first two time paths (grey and yellow) are just as explosive and lead to default very, very quickly. Given that the difference between them is between no privatisation at all and fully successful privatisation, it is clear that the merits of privatisation (from the perspective of preventing a Greek default) are precisely non-existent: Both time paths lead Greece’s debt-to-GDP ratio to stratospheric levels.

The second poignant result is that the situation is so dire that, even though Policies 1& 2 of the Modest Proposal manage to deflate the debt mountain facing Greece, without the European Investment Bank’s eurobond-fuelled Pan-European Recovery Program the spectre of a future default will return to haunt Europe [even after the unification of the Maastricht-compliant part of Europe’s debt (with the parallel issuing of ECB-eurobonds – see our Policy 2), accompanied by our Policy 1 for dealing with Europe’s Great Banking Conundrum (see Policy 1)].

Indeed, only the fully-fledged Modest Proposal (see Scenario 4) has the capacity to diffuse the problem, and push Greece’s debt-to-GDP ratio into a sustainable path. The picture is clarity personified: The Modest Proposal, including all three of its Policies, is the only thing that stands between reality and a Greek default.


Martin Wolf, Paul Krugman, as well as a number of the brightest Central Bankers on the continent, have argued, correctly, that a Greek default is both inevitable (under the present mix of policies) and catastrophic for the eurozone as a whole. In this post I just demonstrated that they are more right than they know: Presently, they fear that the EU-IMF targets for Greece are over-optimistic. The fact however is that, even if the EU, the IMF and the Greek government manage to convince the gods  to answer their collective prayers regarding the Greek budget’s targets and the success of the much adnertised privatisation program, a Greek default is unavoidable.

So, what do we do? Martin Wolf is at a loss. He knows that some form of further continental consolidation is of the essence but, at the same time, he recognises that federation is pie in the sky. This is where the Modest Proposal comes in: For it allows Europe to forge enough common ground to stop the crisis on its tracks without requiring of our fragmented political system to generate a federal push that it is incapable of.

[1] Underlying growth rate assumptions: Assuming that the current austerity and official loan mix is maintained in the future, we input the following growth rates in Scenaria 1,2 and 3: For 2011, we used the official prediction of -3.2%. Thereafter we assumed that the recession bottoms out in 2012, that growth edges up to 1% in 2013 and 2014 before reaching an average of 2% thereafter. For the fourth scenario (in which the EIB is empowered to carry out large scale investment projects, the assumption is that the growth rates rise to 2% in 2012 and stay within a very modest 3% to 3.5% interval thereafter. The Modest Proposal is thus tested under very modest assumptions.


  • Nope.

    As much as I admire your “Modest Proposal” it is pie in the sky. Sorry. The best thing we Europeans can do is to sit down together and figure out how to dissolve the EMU without doing too much harm to the patients. The alternative is to kick the € can down the road as long as possible only to face the consequences later. But then some patients will be dead.

    European citizens (the so called “core” — the good ones — and you lazy Greeks) will both have a understanding that abandonment of the € is a dramatic but necessary move. And they will also show some goodwill to resolve the problem on common grounds without starting some World War 3. Because afterwards they have the assurance the problem is solved. Thus they will bite the bullet.

  • I am not an economist, but rather an engineer by training, still I find your conclusions to be sound, coherent and in line with common sense, which is more than can be said for most of the economic mumble jumble that has flooded the media both here in Greece and abroad these days. For me the critical question however is this; how do we go about persuading Greek policy makers and Eurocrats alike that they need to grasp the notions you (and others of course) have negotiated so eloquently ? I am afraid I lack a persuasive answer and am all too fearful that we are by now indeed standing at he cliff’s edge with nothing to hold us back any longer.

    Thank you for a witty and structured analysis. Let us hope that someone is paying attention…

  • Why don’t you show your ideas in the Greek media?
    I have seen you on TV a couple of times, and I read your column at protagon.

    Just today I heard a conversation about these issues on the radio. Nobody really knows what this whole “crisis” is about.

    I am convinced that you are absolutely right.

    You should *force* your ideas to the correct people.
    Not just talk about it, make them understand!

    Thank you.

  • dear Yani,
    I am very much impressed by your lucid and educating comments on the present economic woes of Europe , our country and the world. However, in your analysis it seems to me that everything depends on the size of the numerator (GDP). If scen. 4 is applied but the multiplier of EIB s intervention is closer to 1,3 (because of our country’s chronic state dysfunction ), then growth after 2014 would be much slower. Is it possible that scen. 2 then would accelerate growth in the range of 3-4% in the first 2-3 years after 2013 and then revert to 2% for the duration of the prognosis? What would be the outcome then? I think your modest proposal would still give the best outcome, but not by that wide a margin. Thank you for your very entertaining thoughts. You have kept me on my intellectual toes for the last six months that I have been following you,

  • I do not think we disagree. I’m totally with you on the issue what might solve this quite dramatic crisis. What we do not have in common is your — enviable — optimism.

    My rule of the thumb is: once you must ferociously defend your argument about basic accounting identities which are beyond ideological disagreements something is very very wrong. I’m living in Germany and the wisdom of the crowds nowadays seems to be: every nation which is thrifty and industrious can be an export superstar. I’m still waiting for some alien UFOs to arrive to kick off interstellar trade.

    And YES there will be costs for dissolving the EMU. Which must and should be covered by the surplus members of the EMU club. This is my sort of surplus recycling mechanism. But these costs are nothing compared to the costs the ECB, EU and IMF are inflicting on its helpless members. I do not know about you but for me a 45% unemployment rate for young Spanish adults is simply unacceptable. The hysteresis effect will be devastating and the costs to society will be enormous.

    • “And YES there will be costs for dissolving the EMU.”
      So what? At least it will a one time cost. A common central bank or a permanent bail out mechanism carry a limitless risk.

      If they install this ESM or integrate the EU countries any further, I cannot avoid that they use my tax money for this inefficient money distribution machine called EU and/or EURO.

      I can however, make less money or move somewhere else.

      Trust me I am pretty moderate. If this keeps on you will see parties in the parliaments in the North that noone want to see. But to get rid of the EUdssR maybe I would like to see them for a while…

    • I sympathise with your sentiments almost entirely. The present state of affairs is immiserating everyone: Germans and Greeks, Finns and Spanish alike. It is a deplorable state of affairs. The result is not only economic stagnation in all parts of the eurozone but also the loss of political and democratic legitimacy throughout the continent. Both in the North and in the ‘South’ (which includes Ireland) electorates are rejecting the current policy mix and get the distinct feeling that democracy has died long ago; that our leaders are accountable only to themselves and to bankrupted bankers. Where I do disagree with you is in, what I consider, your under-estimation of the costs of breaking up the problematic euro. To put it bliuntly: The one-time, lump sum costs that you are referring to will be hideous and most likely to spark off a new Great Depression that will hit the North more dramatically than it will affect the South.

  • It has become evident to me during the last couple of weeks that the “system” (it may include ECB, IMF, Euroleaders, you name it) has decided that the best thing to happen for Eurozone is for Greece to be saved at any cost, otherwise there is the risk of contagion. They are probably right. The problem is that the policies applied so far, either at the level of framework (Memorandum) or at the level of implementation (Greek government) are failing, if the goal is solvency. Unless we are about to experience a China-like growth in the next decade or so. No comment there.
    What I’m afraid can be the result for Greece after few years is to be left to deafault, once Portugal and Ireland return to stability and the Eurozone banking system is immune to a Greek default. The rescue packs can be seen as system insurance against an earlier than wished default. Without having fixed our house’s order and with a lot of what is currently state wealth sold, I think the picture will be kind of bleak, won’t be?

    • Do you really believe that Portugal and Ireland will return to stability? I doubt that.

    • The talk about “risk of contagion” when the other patients are already sick is absurd.

      I have rarely seen that politicians take economically wise diecisions. I have restructured a few companies that were almost dead. From my experience it is best to sell or shut down the loss makers (=”kick them out”). This is impossible here.

      So the only thing to avoid harm to the populations of other countries politicians of these countries must do is to get out themselves. I believe if Germany gests out this would be best for Germany and better for the South. Trichet can start printing money and the Euro will devaluated. Very simple.

      The talk about that Germany needs a weak Euro to export is bull shit. Switzerland is doing well with the CHF at record highs and about 2/3 of the cost bar of german exports are imported goods/services. So the impact is small and can be offset by efficiency increases AND lower interest cost.

      The Euro has cost Germany more than EUR 1000 billion so far if you factor in the higher interest cost. This is more than it cost to buy and Rebuild eastern Germany and pay for social stuff there for over 20 years.

      Baroso called the EU an empire a few years ago. the good thing about empires is that they break apart sooner or later.

    • Germany has the right to get out of the euro. The German people have an obligation to stop the current madness (loans to Greece plus austerity). So, far we agree. The question is whether it is best, as you say, that Germnay does get out. That it is preferrable to the current situation, I agree. Alas, it will also come with costs which, as I keep saying, you are underestimating grossly. Do not make the mistake of thinking of a macroeconomy in terms of a company which can be restructured as per your experience. If Germany did well in the past under an expensive Mark, it did so courtest of the US’ enormous capacity to create demand for German exports both within and without the US. But since 2008, that amazing transatlantic machine that sucked up Germany’s exports has ceased to function. China may be helpful, currently, but it will not continue to import German capital goods for long. In this sense, a German retreat from Europe is going to turn out a major strategic error for Berlin. Germany’s future ought to be in Europe. In a reformed Eurozone. In a Eurozone which gorws uniformly be means of an effective, rational mechanism that invests surpluses productively in the regions (including some German ones) that would, otherwise, be falling behind in terms of their investment performance.

    • If you want a different take on why events unfold in financial markets and in the Eurozone in the way that they do, then please have a look at this article. It will explain to you why what is “logical” for the long-term benefit of the Eurozone and the EU is “illogical” based on the reality of system dynamics. You have to look at reality when trying to solve problems. You can’t come up with solutions that depend on assumptions about motivations that have no correlation whatsoever with power dynamics and reality.

    • In fact, I have a modest solution. Let’s call it Modest Solution 3.0. The Hellenic Postbank of Greece should use the balance of its portfolio to take out MASSIVE naked short positions on Greek government debt and then send out the government spokesperson to say that Greece is going to default. The market will sell off and Greek bonds will go to zero. Then, TT can cover its shorts, and use the profits to go long, buying up all the Greek debt it can get its hands on at a fraction of the price. The government will then have paid off its debt without defaulting, and give a giant middle finger to all the primary brokers and banks that have been breaking its knee caps for the past year.

      How is this for a modest proposal?

  • Dr. Varoufakis,

    You are a smart guy, and you seem like a cool guy too. I’ve been following your posts rather regularly for the past few months, I’ve never gotten the sense that you give a shit about how you sound or what other people think of you beyond maintaining your integrity. Basically, you seem like a good guy, and someone that your fellow citizens can trust. This is the greatest compliment I think that anyone can receive in these very sad times for our country, and I’m proud that we both are working in the same cause to save our nation.

    Where you and I disagree most seems to be on the motivations and intentions of individuals and institutions wielding the most power in these negotiations. You seem to have the “academic’s” sense of naivety when it comes to understanding power and what moves these types of proposals (like your modest proposal forward). Not once have I seen you address the reality of this situation, that predatory banks and financial institutions are using Greece, and Ireland, and any other wounded deer to manipulate central banks into giving them more cheep money. The bond market for Greek debt has become a money laundering mechanism for the banks. The EFSF and ECB are used to funnel money through these nations to the banks, which benefit from this partnership. They DON’T WANT your modest proposal. Even if you make the argument that it is in the best long-term interest of shareholders and citizens, it doesn’t matter. The amount of money that the top bank executives stand to make every quarter from functioning purely on a short-term basis mindset is enough to convince them to sacrifice any long-term objectives.

    You and I also disagree on the very notion that you even need a central bank. In my view, once you look at the facts, eliminating the central bank becomes a no-brainer, since the entire role of the bank is enable unnatural profit-making and monopoly control of the financial universe by the largest banking institutions This is indisputable and it is born out in the historical record. I am referencing the words of central bankers themselves when making this point. I just don’t think there is an argument to make here. However, I also don’t believe that having this argument right now is even important considering that we can’t even agree on what the dynamic is that governs the current policies aiming to turn Greece into country of landless people governed by foreign banks through a soft layer of domestically bred oligarchs.

    I hope you turn around on this, and at least recognize just how vicious and predatory the ECB mechanism and TROIKA is. Unless it is just your method of analysis that presents you to be “calm and collective,” I would suggest that you really take a hard look at what the endgame for Greece here is, and understand that it is not one that will be born out of ignorance on the part of the “wise eurocrats” but one that will arise out of greed and a desire to consolidate by force without respect for the nation of Greece, its history or its people.

    • I so appreciate your thoughtful comment and will be anxiounsly awaiting for YV’s response.

  • Everyone that understands and followed the events -of this kind of theater of absurdity- from the beginning, would have understood that either we change the rules or we end the game. I do not see something in between.

    The real success stories came only when conventions broke down. And i am pretty sure you are aware of how rigid conventional wisdom is. Although, for the Eurocrats it fits better the following quote from Krugman:

    “Some of the Europeans have me thinking about the Pharaohs. Why? Because they’re kings of denial”

  • Dear Dean Plassaras,

    please read Jean-Claude Trichet’s speech from yesterday on the occasion to be awarded the Karlrspreis in Aachen. And then tell me whether you want to hand over more power to this unelected unaccountable institution. You can find the speech on the ECB website.

    To paraphrase our new Viking Chieftain Jean-Claude: “Would it go too far if we envisaged, at this second stage, that we — the EU vikings in liaison with the ECB vikings — invade a country which is still not delivering, pillage its treasures and subjugate its labor force.” I’m in complete agreement with Michael Hudson writing EU: Class War Declared.

    • Dear Stephan:

      The issue here is an unequal response to moral hazard.

      When the US (where the crisis first errupted) introduced moral hazard in rescuing “too big to fail” insitutions, the stage was set. (the global stage that is).

      Just like in the US case, Greece is “too big to fail” period, end of story.

  • If the Modest Proposal is applied then the question comes:

    How things can stay at the limits of the Modest Proposal without pushing further towards the idea of a political federal union?

    • It is up to us, Europeans, whether we wish to stay within these limits or, alternatively, to consider a more federal solution. The beauty of democracy is that it is open-ended. The merit of the Modest Proposal is that it gives us a chance to hold these discussions in the fulness of time.

  • Yianis, I don’t get it. “Meeting the targets of Mkx” presumably means decreasing state OPEX and increasing growth. (For example, privatization decreases state cost and “pushes” people to work for themselves, possibly increasing innovation and exports). What is it then in your model that still increases debt (or decreases GDP)?

    • Recessions are self-perpetuating. Recessions happen when GDP is falling. What is GDP? It is the sum of private and public spending. In a recession, private spending is falling as people and firms are trying to cut costs and private debts. If, in this recessionary environment, the state cuts public spending, the private sector must increase its own spending by a similar amount in order to prevent a further drop in GDP. But, given negative expectations regarding demand, the private sector does not take up the slack in this manner. [Additionally, when OTE shares are sold by the state, there is no guarantee that their buyer (Deutsche Telecom) will invest in OTE more because it now holds a large share. It will only do this if it anticipates stronger demand. But, for reasons I explained above, it does not.]

  • Prof. Varoufakis, it should be obvious that the reasons that EU does not attempt any reasonable measures to address its crisis, is not the economy’s viability. In other words, the reasons are political. By now we must assume that Germany *wants* to “be forced” to exit the eurozone herself (maybe your chart should mark election years in Germany and France?).

    Enforcing the shock doctrine internally in eurozone, and abandoning solidarity and democratic principals, triggers an inevidable demolition of the EU. Instead of expecting for someone to lend a favorable ear to reason, you should accept that EU representation has failed and start thinking of a proposal that reduces Greek loses, targeted to our future outside the EU.

    Just an opinion,

    Stamatis Kavadias,
    Computer Science PhD

    • I really do not think that the ‘Germans’ have decided what they want. Let us not forget that, like with every nation, Germans entertain a variety of views. Even within Mrs Merkel’s inner circle there are major disagreements. The problem is that, while they are sorting out what they want, the crisis in Europe (and in particular here in Greece) is turning into a monster.

    • Prof. Varoufakis, I have not mentioned ‘Germans’ anywhere –only Germany. This is not by chance. It is because the population does not have the ability or the time to analyze the facts of global economy, and will be mislead by governments, at least until their privileges become the target (for healthy nations).

      The notion of “lack of inspired leadership” in the EU, that has been for some time as a moral in many european stories, is now metamorphosed to an establishment that actively claims the “best view” to what is reasonable and will spread it via the media and political party mechanisms. That is, european politicians (mixed with bankers) will claim “the only reasonable path” because they can –and this is a problem of democracy.

      But shortsighted politicians will also claim “the only reasonable path” because of the interests of banks and monetarists (ECB) that do not want any “regulation” (like policy 3 of your Modest Proposal) of how to invest their gains from loan interests. The future is going to be a proof of their power, and Orwell’s “1984” is not far. The die is cast and we should be looking out for our self, before it is too late.

  • Now the game is just BUYING TIME FOR GREECE to postpone
    default in hope of an economic up turn in the Eurozone.
    I think prospects right now look rather bleek with a China slowing down and US in murky waters with bad economic numbers piling up to a possible renewal of QE stimulus later in June or face a double dip!Bernanke hopes of recovery seems to have fallen short.Adding Bond market showing signs of dip a leading indicator.With a new QE follow new Commodity rally and shorting USD type carry trade we have seen a long time.Instead of a deflated EURO future can bring issuance of new currency AMERO frightening scenario for many but how knows fantasy turns into REALITY.Coming years will disclose
    how exactly the NEW NORMAL looks like!The Modest proposal solution for Eurozone might come to light though in a modified form.Spreading knowledge of this idea into authorities essential if not ECB allready have something cooking behind the scenes waiting for acceptance as a new step in the structure of Eurozone

  • Dr Varoufakis

    The assumptions you have made over the growth of our debt do not take into account the political factor.If your proposal is fully implemented and it produces the results you advertise there is a very good chance that Greece will be worse off.Reducing the debt levels of Greece and supplying the country with a very handsome source of credit (Eurobonds) without making any significant reform will simply cause our politicians to continue with the destructive policy of government spending.If Greece’s market is not liberalised now,that certainly won’t happen when we have a better credit rating and an endless river of funds coming from Brussels.Reforming the country is a necessary condition to the point where any sort of European solution is irrelevant since Greece will become insolvent again.
    I too was convinced that Mk1 would not be a solution to Greece’s debt problem but it would have certainly been a step forward since most of the reforms it proposed had to be implemented anyhow.One year later not a single step has been made towards the right direction due to the unwillingness of the government.Of course every time there is a payment due, the government pretends its making tough decisions that are of course forgotten until the next installment,yet we still talk about what the Germans,the French and the Finns should do for Greece ignoring(?) what the Greeks should do for their own country.
    One last thing about your proposal;If I am not mistaken you are suggesting a massive package of “quantative easing”.Although inflation here will probably not rise significantly,that won’t be the case in Benelux,Finland and Germany.How is the modest proposal dealing with that?

    ps:I am glad you warmed up to Maggie’s TINA.

    • From last May (2010) onwards, the powers-that-be (EU, IMF, Greek government) describe the Greek bailout as a package of loans and policies the purpose of which is (a) to throw Greece a lifejacket (so as not to sink in stormy waters) and (b) to give it a chance to (and bind it to a set of obligations that) intoduce a growth revival. Some of us (me included) had warned that the lifejacket on offer would not help Greece stay above water and, also, that the accompanying reforms would fail in a recessionary environment in which government has no money to invest in the reforms (nb. something most people seem to be forgetting today is that genuine reforms cannnot be done on the cheap). Events have proven the essence of these objections beyond reasonble doubt. So, the point of the Modest Proposal is to propose ways in which (a) and (b) can be accomplished. The three policies it consists of, Policies 1,2&3, offer a prospect of stabilisation and mild growth which is a prerequisite for reforms. When a swimmer is drowning, lifesavers must first save him before worrying about improving his swimming skills. To sit idly worried that if they save him he will end up in a tight spot again (out of sheer stupidity) would be criminal. And when their own survival depends on not letting him drown, their dithering is bordering on the idiotic. Back to the Modest Proposal’s main point: Notice that: (i) We are not suggesting that all of Greece’s debt is shifted to the ECB. Only a part that would allow Greece to render its debt problem manageable (this is equivalent to throwing a lifejacket to the drowning swimmer) – a prerequisite for any prospect of stability which is a prerequisite for any kind of successful reforms. (ii) The involvement of the EIB, which Policy 3 advocates, implicitly demonstrates that we do not believe that the Greek state should be trusted with European monies for investment purposes; that, while mass investment is essential in Greece, it should be husbanded and managed by the EIB. Lastly, you misunderstoof spectacularly the monetary aspect of our proposal. In it there is not one iota of a suggestion for quantitative easing. Having the ECB borrow in the international markets, by issuing eurobonds, in order to effect a conversion loan for member states, one that reduces aggregrage eurozone debt, is precisely the opposite to quantitative easing. Not only will it have zero inflationary effects (since the quantity of euros will remain unaffected) but it will also strengthen the demand of the euro (as it will create a new, liquid market in euro-denominated paper). PS. Be as glad as you like, but I fail to see where and how I warned up to Maggie’s TINA (which has, aided and abetted by her heir and successor, Mr Blair, turned the UK into an, effectively, banana republic).

  • Dear Dr. Varoufakis, your Modest Proposal seems quite evidently a logical and honest solution to a problem which is rather European than just greek. It concerns a serious step towards the completion of a monetary union, whose architecture was destined sooner or later to lead to a similar situation to that we now face.

    Many in Europe share the same (more or less) opinion with you and have officially proposed it (Jean Claude Junker, Giulio Tremonti and Guy Verhofstadt among them), even the greek government itself! ( ). Apparently Berlin and Paris have a different opinion. The question here is what do they know that we miss??? I can’t really believe that politics in Germany still continue to play such a crucial role in addressing the crisis (although it seems they did at the beginning of the crisis)or that the germans are playing with fire in order to be able to set the agenda at EU level.

    Given that most (well-respected) economists do not believe in the effectiveness of the austerity formula that is applied in Greece, I am given the impression that all this effort is just in order to delay the inevitable. So I have since long time the same question which Konstantinos Iliopoulos mentioned above. Could all this be an effort to buy time in order to stabilize the economies of Portugal and Ireland and to limit the losses of german and french banks using all europeans’ taxpayers money? “Never mind the greeks. They should have been more careful with their finances”.

    Do you believe that the stabilization programs of Ireland and Portugal could work, given the time, which makes Greece’s (probably hopeless) effort a necessary sacrifice (from the European point of view) in order to minimize the systemic danger it poses for the eurozone if restructuring comes “too early”?

    Because if so, Berlin’s insistence to reject a proposal like yours makes perfect sense.

    Thank you

  • You are so right. They are just playing for time, deepening and crisis in the meantime. Will the Irish and Portuguese programs work? Under no circumstances. The whole edifice is crumbling. So, do they know something we do not? Not really. The simple explanation for the dithering is that the surplus countries have so far not deciced how to tackle a dilemma they do not want: Between (a) allowing the euro to collapse (while retaining their option to leave the euro) and (b) ending the euro crisis (e.g. by adopting something like the Modest Proposal) at the expense of their option to exit (which dies the moment common debt, eurobonds etc. are introduced). Given that the option to exit furnishes the country that has it with immense bargaining power within the EU (when most of the member-states do not have this option), the surplus countries are caught in a bind: On the one hand they will be damned if they forfeit that exit option. On the other retaining that option means that the euro’s disintegration is evolving out of control.

  • Hello, I read your modest proposal with great interest after listening to Doug Henwood’s radio show.
    I am having trouble grasping the concrete implications of policy #1 (the tranche transfer).

    Let me work through my understanding, then you can correct me.

    Say I’m Credit Agricole, I have x amount of Greek government bonds on my books.
    The tranche transfer happens: from now on it will be the ECB who will pay my coupons and ultimately give me back the principal (I’m assuming my bonds were within the 60% transferred).

    The market and I should be confident that the ECB can do this because
    1) It will raise finance by issuing euro bonds
    2) It will have income from countries paying their tab (negative account created upon tranche transfer)

    If this interpretation is correct then I get confused:
    Europe is not the US, it doesn’t enjoy the perception that it will always honor its obligations like the top dog does. The ECB relies on Europe’s banks borrowing from it for black ink, and this only works if those banks have credible collateral to back their borrowing. But now we’ve gone full circle: it’s a debt crisis because there’s too much debt chasing too little income (collateral).

    From there, here’s what I think would happen: the market will price the euro bonds well below what would be necessary for the countries with a big tab to pay it at a rate that they can afford. And the ECB will not be able to do anything about it (barring a political leap in which European states agree to back it fiscally, and how).

    I completely agree with the investment part of your proposal, as Doug has been explaining, the core of the problem is in the pitting of under-developed economies against power houses like Germany.
    But then the national capitalist classes that run the show don’t invest in under dogs for the fun of it.
    I think it is a better strategy to appeal to the peoples of Europe:
    -encourage the Germans and French to demand wages that reflect their productivity
    -encourage all Europeans to refuse financing bond rentiers at the expense of the living standards of the Greek, Irish, and ultimately everyone

    If it’s too much for capital to take then we’ll move on

    • Two are our points of sharp disagreement: First, we have a completely different view of the workings of international money markets. Investors in China and elsewhere would fall over themselves to buy ECB-issued eurobonds and, thus, the yields would be extremely low. (Look at the current demand for the problematic EFSF’s bonds.) Secondly, your proposed alternative would deepen the crisis. For what you are suggesting is a large fall in French aggregate demand which will, in a short space of time, cause the French banks to eclipse Greece as the locus of Europe’s troubles. As for the idea of envcouraging investors to ” refuse financing bond rentiers at the expense of the living standards of the Greek, Irish, and ultimately everyone”, I am afraid it is as realistic as encouraging a socrpion to use its venom for medicinal purposes.

    • Thank you for taking time to reply while you’re being bombarded with interviews, and congratulations for that, I hope it keeps up.

      On your first point, the reason why I don’t share your optimism is that it looks too much like displacing the US’s prerogative (as borrower that can do no wrong).
      The EFSF gets collateral from the EU budget, and is backed by the IMF (an impossibility without a US green light), so how its bonds fare doesn’t shed light on how euro-bonds issued by the ECB would fare.

      About my suggestions, could you explain which part would cause a fall in demand?
      As for rentiers taking losses, I wasn’t calling on investors to make that happen, but on the peoples of Europe. It would take a great deal of political organizing across Europe to agree an orderly write-off of enough debt to permit the improvement of living standards. But then so would coming to an agreement in which the surplus economies help countries like Greece or Ireland develop their productive capacities (your policy #4, without which the can is just kicked down the road).

  • It’s clear these bailout packages have nothing to do with Greece and Ireland. €80 billion for Ireland, population 4 million, €109 billion twice for Greece, population 9 million – the figures are astronomical. I certainly have good grounds for suspecting the Irish “bailout” of €80 billion actually went to the UK which has been bankrupt for a long time – only North Sea Oil kept it going to pay interest on the money it borrowed and produciton of that is now down to 1 million barrels per day from over 3 million in 1999. The “Greek” money is probably being funneled to Italy.

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