The New York Times’ article on our Modest Proposal: My reaction

As regulars of this blog know, its initial purpose was to promote a different way of thinking about the global, euro and Greek crisis and, in particular, to present what Stuart Holland and I call the Modest Proposal for Overcoming the Euro Crisis. (See also the plethora of supporting posts here.) Today, the New York Times published an article which presents the Modest Proposal in some detail in the context of a journalistic story of how it was nearly taken up by the Greek Prime Minister. It was authored by Landon Thomas and entitled Puncturing Greece’s Dream for Sharing Its Pain (8th June 2011).

Below, I reprint the article and annotate it meticulously for the purposes both of elucidating the Modest Proposal itself and of commenting on the NYT’s take on the train of events surrounding the Greek PM’s dallying with this proposal. But before I do this, it is important to make a point about the scope and purpose of the Modest Proposal itself: It was never meant as a plan for salvaging the Greek shipwreck. It is, rather, a plan that Stuart and I have been sculpting, for some time now, with a view to (a) arresting the eurozone’s centrifugal forces, and (b) giving Europe a much needed growth spurt. To the extent, of course, that these aims are met, the Greek crisis would be resolved as a matter of course.

Did we think that the men and women in authority (in Greece, Berlin, Frankfurt or elsewhere) would read our Modest Proposal, be struck by its logic, and adopt it forthwith? Of course not. However, we knew (and remain convinced) that the euro crisis is spinning out of control. Our task, as we saw it, was to plant in their minds the seed of a feasible, rational, comprehensive solution which, when the powers-that-be run out of options, may grow and yield a way out of the calamitous impasse. That the Greek PM did not pin his colours on its mast is neither here nor there (even though we would have liked him to run with it). We remain convinced that, at some not too distant point, Europe will have to choose between allowing the euro to disintegrate or adopt policies that echo the essence of the Modest Proposal’s three main policies.

The New York Times article annotated:

NYT: In March, just as it was becoming clear that Greece might have to ask Europe for another package of loans to prop up its failing economy, Prime Minister George A. Papandreou seriously considered a radical plan intended to resolve, once and for all, his country’s debt crisis.

YV: Cynics may doubt that the Greek government lacks a capacity seriously to consider anything that does not come its way, these days, from the EU, the ECB or the IMF. Caught in the clasps of a multifaceted panic, its attention span is minuscule. In this sense, it would be appropriate simply to say that George Papandreou considered our plan, i.e. to delete the adverb “seriously”

NYT: Under the proposal, Greece would transfer as much as €133 billion — or 40 percent of its government debt — to the European Central Bank, which would then pay off the obligation by issuing its own euro bond. It would be a “restructuring without a haircut,” in the view of the plan’s proponents, who enthusiastically described it to Mr. Papandreou in a series of secret meetings earlier this year. The result, ideally, would be to ease the weight of the Greek debt on the economy, clearing the way for renewed growth, while keeping the bankers and credit ratings agencies on board.

YV: The reader unfamiliar with our Modest Proposal would be excused to miss an important point here: This is not just a plan for restructuring the Greek debt without a haircut. The force of our proposal is that it is a plan for restructuring, without a haircut, the debt of all fiscally stricken eurozone countries. Indeed, of any eurozone member-state that wishes to partake. The phrasing in the NYT article makes it sound, erroneously, as if our plan was tailor-made for Greece. In fact, one of the proposal’s main strengths is that when it is applied to a large majority of member-states (including, at the very least, Greece, Ireland, Portugal, Spain, Italy and Belgium), a large mountain of sovereign debt will shrink and, in this way, spreads will fall throughout the euro-area kickstarting a virtuous circle that will rebound toward every nook and cranny of the common currency area.

NYT: In many ways, the plan was a dreamy alternative to the grim calculus of Europe’s demands for more austerity from Greece in return for more loans.

YV: Dreamy? Perhaps. But, as they say, good ideas are condemned to be seen as romantic at first, dangerous the moment they receive some support, inapplicable at the point when some crisis is forcing the powers that be to acknowledge a lack of options before, finally, they are espoused as… self-evidently appropriate. Then again, I would say this, wouldn’t I?

NYT: And Mr. Papandreou went so far as to ask a political ally and the plan’s two proponents, a British and a Greek economist, to lobby Europeans in its favor.

YV: And there is the rub. For the Greek PM is perfectly capable of endorsing opposing ideas at once, of agreeing with different people advocating divergent proposals, of becoming so enthusiastic with a plan or idea that, soon after, he has forgotten about it (at least for a long while).

NYT: But, according to economists who participated in the discussions, the Greek finance minister, George Papaconstantinou, was opposed, arguing that Germany, to say nothing of the E.C.B., would never go for it. And while a number of economists contend that Europe will ultimately have to develop some sort of plan for restructuring Greece’s debt, Athens has shelved any such notion for now as it moves toward another bailout to keep the country out of bankruptcy.

YV: I could not have put it better myself. Our finance minister has turned second-guessing the ECB and Berlin, and choosing his posture as if in order to tell them that which they wish to hear, into an Olympic sport. When the ECB and Berlin have reason and right on their side, this is not a bad strategy. But when Europe’s leading lights are dim and yellowing, unable to pierce the approaching storm clouds, Mr Papakonstantinou becomes a liability for the whole of Europe. Clubs in crises require leadership. Even from the club’s weaklings. Especially when the weaklings are about to borrow an ocean of money that may soon turn into a tsunami of defaults that sweeps everything along its path.

NYT: “It was a nice idea, but not defensible in current circumstances,” said Daniel Gros, the head of the Center for European Policy Studies in Brussels, who took part in one of the meetings with the prime minister to discuss the plan’s merits. “If there is one person who can not propose something like this it is the Greek prime minister — it would have to be a German.”

YV: That was indeed Daniel Gros’ view. And it blew an ill wind into Mr Papakonstantinou’s sails. While Gros is perfectly right that it would be grand to have a German in authority sponsor the Modest Proposal, the proposition that decent ideas are to be rejected because they are voiced by the club’s weaker members runs in the face of a notion we used to think of as important: democracy. It is indeed a sad day when our European democracy degenerated to such an extent that ideas began to be assessed not in proportion to their merit but on the basis of the accent of their proposer. More poignantly perhaps, it is rather worrying that intelligent Europeans, like Daniel Gros, have come to the conclusion that insolvent small countries must bite the bullet and, without a hint of protestation, borrow gargantuan new loans at interest rates they find impossible to bear.

NYT: This week, Mr. Papandreou is struggling to persuade his increasingly disruptive party members that Greece must agree to another round of austerity measures to qualify for a second portion of loans from the European Union and the International Monetary Fund, including closing down public-sector enterprises, selling more assets and ramping up the tax take. The new package will be submitted to Parliament on Thursday and a vote is expected before the end of the month.

YV: As a government MP put it to me the other day: “They gave us a pistol and the choice: Shoot yourselves or hand it over and we shall shoot you.” Make no mistake dear reader. This is the dilemma as Greek government MPs see it presently. Will they buckle? Most will. But some won’t. Already, a number of them are thinking of resigning their seats rather than make a choice. All it will take is  6 or 7 of them to vote against and Mr Papandreou’s government is history. The only thing I do know for certain, at the moment, is that a number of MPs’ minds have not been made up yet. The outcome is up in the air.

NYT: Signs are growing, however, that the patience of the long-suffering Greek public is wearing thin. Mr. Papandreou’s approval ratings are below 30 percent and, as uncertainty builds, Greeks continue to take money out of the banking system.

YV: Too true. Legitimacy is becoming as thin on the ground as the banks’ coffers are becoming bare. However, the NYT article understimates the breadth of the problem. Legitimacy is not only in short supply here in Greece. It is becoming increasingly scare in the surplus countries too (Germany, Austria, Finland and Holland). Our Northern partners are feeling that their taxes are used to lend to Greece monies that will end up in the coffers of quasi-insolvent banks, disappearing without a trace from the circular flow of European income. Thus, the approval ratings of all mainstream politicians, in both the ‘North’ and the ‘South’, are dropping like stones in a thick liquid while, at the same time, most of the eurozone’s banks are evolving into Japanese like financial institutions, i.e. Albatrosses around our economies’ necks.   

NYT: Mr. Papandreou’s interest in a plan to transfer much of its debt to the rest of Europe may well have been a passing fancy.

YV: I only wish I could summon enough conviction to deny this…

NYT: And his chances of persuading Jean-Claude Trichet, the president of the E.C.B, to take on even more debt on top of the nearly €200 billion, or $292 billion, it already is exposed to were always going to be a long shot.

YV: Here I can summon enough conviction to protest the point. The reason is that Mr Papandreou would not have to convince Mr Trichet. If the European Council decided to adopt this proposal, Mr Trichet would be obliged, by the ECB’s charter, to assist the Council and the Commission in their pursuit of the Union’s broad economic pursuits. Furthermore, I dare say that Mr Trichet would not oppose the Modest Proposal (especially if Germany adopted it first). What he opposes passionately is the idea that the ECB manages the debt crisis by buying debt against its own account. The whole point about the Modest Proposal is that the ECB’s conversion loan to member states does not involve a debt buyback and would be revenue neutral, as it would be financed by the eurobond issues.

NYT: “The prime minister is in favor of the proposal,” said Vasso Papandreou, a former top financial advisor to the prime minister and an influential member of Parliament within the governing Socialist party, known as Pasok, who has been openly critical of the government’s austerity plan.

YV: Vaso Papandreou’s predicament is highly instructive. One fine morning (or perhaps afternoon), the Prime Minister called Vaso and asked her to head a PASOK (the governing socialist party) parliamentary committee whose purpose would be to canvass for eurobonds. This was announced with much fanfare in the media and was also given an appropriate label: The Eurobond Committee. Alas, soon after, Vaso realised that her committee was hanging in mid-air: Animosity from Mr Papakonstantinou’s (the Finance Minister) team and precisely zero support from the Prime Minister. Naturally, she allowed the committee to fade into oblivion since convening it and pushing ahead (against a background of hostility combined with indifference) would resemble a Sisyphean task.

NYT: “This is not a Greek problem any more — it’s a European problem.”

Ms. Papandreou is not related to the prime minister.

YV: Vaso Papandreou, in short, understands the essence of the problem: However the crisis may have commenced, it is now a European-wide disease that can only be cured by a Pan-European therapeutic treatment. The Modest Proposal’s purpose was to suggest such a treatment in a manner that does not require any major Treaty changes (which would have rendered it politically and institutionally infeasible).

NYT: A spokesman for the prime minister said that Mr. Papandreou and other European officials had long supported a euro bond as one policy option, but that his current priority was to make the Greek economy competitive again.

YV: A delusion in search of a justification. That’s the gist of the spokeperson’s statement. For if the Greek economy could become competitive again, without a eurobond, without a pan-European plan for tackling effectively the eurozone banking crisis, and without a new Marshall Plan for Europe, then why bother with a eurobond at all? Why antagonise the German government which clearly opposes the very notion if the Greek PM does not think that a eurobond is a necessary condition for exiting this dismal crisis?

NYT: “In search of the best solutions to effectively and permanently exit the crisis, the prime minister will continue to exchange views with his counterparts around the world as well as leading economists and academics,” he said.

YV: If only Oscar Wilde were alive… Or perhaps Jonathan Swift. They would have had a field day with this lame response the true purpose of which is to hide the hideous truth that Mr Papandreou, aided and abetted by his Finance Minister, is simply unwilling to utter a single word outside a script written for him by the likes of Mrs Merkel and Mr Trichet. Period.

NYT: The two architects of the idea have longstanding ties to Mr. Papandreou. They have characterized their sweeping plan, with a bit of cheek, a modest proposal. Yanis Varoufakis, a political economist and blogger at the University of Athens, was a speechwriter and advisor to Mr. Papandreou from 2004 to 2006. Stuart Holland is a Europe expert and former high-ranking official in Britain’s Labour Party who was a longtime advisor to Andreas Papandreou, Mr. Papandreou’s father, who was once prime minister himself.

YV: NYT readers will be excused to think that the title afforded me is somewhat more significant than it really is. Mr Papandreou has been known for his co-centric circles of advisors, some of whom have had the character-building experience of also doubling as speechwriters. As the co-centric circles expanded and contracted haphazardly, the speeches turned into a collage of disparate phrases (each written by a different speechwriter), and the process by which policy was determined proved chaotic, my tenure ended with a quiet resignation in December 2006. And when Mr Papandreou decided to run for the leadership of the socialist party in 2007, shortly after losing the General Election of that Fall, I sent him a letter explaining why I was compelled to deny him my support. Naturally, he won that party primary and went on to win the 2009 General Election.

NYT: “When you are insolvent, you do not solve things with new loans,” said Mr. Varoufakis, who this week wrote an open letter to Mr. Papandreou that urged him to reject the onerous terms of the second bailout.

YV: A small but crucial correction is in order here: My qualm is not so much about the ‘onerous terms’ of the bailout. It is about its very logic. The problem is not that the interest rate is slightly above what it ought to be or that the conditions are a little too harsh. My opposition is aimed at the very idea of loans to the bankrupt and austerity for an economy in recession. Could you imagine, dear reader, if President Roosevelt had asked, in 1933, a fiscally stricken state (say Illinois) to borrow monies from Washington on condition of reducing aggregate demand within the state’s boundaries?

NYT: “I want George to look into the camera and tell the German taxpayer: ‘I cannot in good conscience take any more of your money because if I do so this money will just go to the bankers who will only hoard it.”’

YV: Had he done this, he would have (in one stroke): (a) regained mass support in Greece, (b) succeeded in convincing the German electorate that the Greek Prime Minister is mindful of their circumstances (rather than the representative of spendthrift over-reachers who want more loans from them), and (c) forced upon the rest of Europe the debate that we ought to have embarked upon ages ago.

NYT: The plan’s root premise — that Greece is not capable of generating sufficient funds to pay down its debt — is by no means outlandish, and it has been echoed by economists and ratings agencies alike.

YV: My only qualm here is the one I expressed above: This is not just a plan for Greece and its debt but a plan for the eurozone as a whole and regarding (a) the banking sector, (b) the sovereign debt and (c) investment-led Recovery.

NYT: Indeed, in pushing Mr. Papandreou to present Europe with this basic reality, the plan updates one of the more popular sayings of the economist John Maynard Keynes: If I owe you a pound (or euro, in Greece’s case) I have a problem; but if I owe you a million, the problem is yours.

YV: Keynes’ relevance goes much further. This is something the wily Englishman wrote back in 1920:

Moved by insane delusion and reckless self-regard, the Greek people overturned the foundations on which we all lived and built. But the spokesmen of the European Union have run the risk of completing the ruin, which Greece began, by a financial assistance package which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organisation, already shaken and broken by the 2008 crisis, through which alone the European peoples can employ themselves and live.”

Of course this is not strictly Keynes’ own text. But it is damn close! All I did was to replace ‘Greek’ for German; ‘European’ for French and British; ‘Greece’ for German; ‘financial assistance package’ for Peace; and ‘the 2008 crisis’ for war. [See the ‘Introduction’ to John Maynard Keynes’. The Economic Consequences of the Peace, Harcourt Brace New York, 1920.] The point Keynes was making was that Europe cannot maintain its prosperity if austerity and debt-servicing is imposed by the strong upon a weak, crumbling economy. His point remains poignant almost a century later.

NYT: Following that logic, the problem of Greece’s debt is as much the E.C.B.’s, which is now the largest institutional owner of Greek sovereign debt, as it is Greece’s. This reality was underscored this week when the Bank for International Settlements released data showing that European banking exposure to Greece, while high at €121 billion, has been declining as French and German banks have been reducing their exposures. That means, in many cases, that the E.C.B. has been left holding the bag, which helps explain why the central bank is so opposed to any talk of restructuring Greece’s debt, or requiring bondholders to share in any losses, something known as a haircut.

YV: Excellently put. Let me just add the following thought: Presently, the eurozone lacks a joint fiscal policy. During periods of normalcy and growth, this is sustainable. But after a meltdown, like that of 2008, a joint fiscal policy is unavoidable. When the institutions for it are absent, the ECB takes it to itself, whether it likes it or not, to play that role. To be more specific, as we speak, the European System of Central Banks (ESCB) is placing the onus on the German Central Bank to finance the Greek Central Bank which, in turn, keeps the Greek banks liquid which, in turn, support the Greek state by buying whatever short term debt it sells. In effect, the ESCB is financing, indirectly, the Greek State. And similarly with the Irish, Portuguese, Spanish, Italian and Belgian banks and states. The result is both bad fiscal policy and bad monetary policy. So, in response to those who may protest that the ECB cannot possibly issue eurobonds (because this would be to cross into fiscal policy territory) I have the following to say: It has already happened! Our Modest Proposal, if anything, limits such practices by taking the ECB out of the business of financing the issue of new sovereign debt and simply having it issue a revenue-neutral conversion loan (effectively financed by the sovereign wealth funds and private investors who will be buying the ECB’s own bonds).

NYT: Mr. Varoufakis says that there are other important components to his and Mr. Holland’s proposal, like getting Europe’s main rescue fund, the European Financial Stability Facility, to recapitalize European banks and promoting a New Deal-style investment program for Greece. But the transfer of Greek debt onto the E.C.B.’s books is the key, since the E.C.B., with the full resources of the European monetary system as backing, can borrow at much lower rates than Greece can. The plan calls for the debt to be sold as a 10-year bond at 3 percent interest, with Greece paying back the E.C.B. at that same 3 percent over 10 years — in theory at no cost to the European Central Bank.

YV: A small rejoinder: While the transfer to the ECB of the eurozone’s Maastrich-compliant part of the debt is, indeed, a key part of the Modest Proposal, its two other planks are by no means of lesser importance: Recapitalising the eurozone’s zombie banks (a task we allot to the EFSF) and putting in place a major investment-led Recovery Program (by energising the European Investment Bank simply by allowing part of its funding to come from additional eurobond issues) are essential components of our plan for stopping the eurozone crisis on its tracks.

NYT: As someone who has worked closely with the prime minister in the past and keeps in contact with his immediate family, Mr. Varoufakis is convinced that Mr. Papandreou will ultimately embrace his plan as the only alternative to endless pain and suffering for the Greek people. Mr. Papandreou recognizes that the latest austerity proposal is “not going to work,” Mr. Varoufakis insisted. He “is like an atheist now, crossing himself and hoping for a miracle.”

YV: Sometimes I wonder whether my optimism is inherent or strategic...

26 Comments

  • Excellent analysis Yiani. And congratulations. You are fast becoming a Heavy Weight on the debt crisis issue.

    • Of course I am sure that you are aware of this and anyway you ‘re about to do so but I think, given the number of the Academics that cosign, that you should comment it promptly.

    • I have a simpler suggestion: That the Greek PM makes a brief statement that Greece will not be seeking the new loans. Period. Full stop. Then, he ought to sit down and watch the Europeans go into a frenzy from which there will be one of two outcomes: Either the euro will crash and burn or it is will be reformed. And if Mr Papandreou does not want to do this, if only several of him MPs voted against the new loan in Parliament, the result would be the same. My objection to declaring a default is that Greece will then be blamed for actively undermining/destroying the eurosystem. In sharp contrast, no one can blame one for refusing to seek loans that one cannot repay…

  • May I ask you something Yanni? After the Greek PM makes the brief statement that Greece will not be seeking the new loans, our immediate problem will be the roll over of our maturing debt. What if we do another auction for lets say 10 year bonds to roll over that debt. This time though, we set a maximum interest rate we are willing to pay near that of the German or French bonds. Normally that auction would fail. If things are as dire for the whole eurozone as you say, then there must be lots of people that have much to lose if that auction failed. From bond holders that will lose their money to CDS issuers that will have to pay the triggered CDS. Maybe subscribing in that auction will be way cheaper for them in the first place.

  • The Modest Plan for the Euro Crisis is in direct conflict with the Group of Thirty http://www.group30.org, its’ members http://www.group30.org/members.shtml and their findings as published in their recent 2011 Occasional Paper 81 “Regulatory Reforms and Remaining Challenges” http://www.group30.org/pub_82.shtml

    Is it a just coincidence that ECB President Jean-Claude Trichet is already a member of this very influential Washington-based financial advisory body since 1987?

    In 2008, Mr.Trichet won the Vision for Europe Award for his contributions toward greater European integration. It’s high time to put his money where his mouth is.

  • Yes let’s trust the politicians who created this crisis to save us, it makes perfect sense.Let them sell our remaining assets to their buddies and make beggars of the rest. This is a great plan maybe it could be patented and exported to other countries so that we can earn a few extra dollars. It’s about time that the Greek people hold politicians accountable for corruption and convict those that have their hands in the till.You can’t run any business if someone keeps stealing money.

  • Your Modest Proposal is the only one I know that allows for Europe to deal with its crisis without reverting back into nationalism and imperialism. I find your Keynesian transcription particularly relevant since the anarcholiberal destruction of indebted states and their transformation into protectorates run by Europe’s surplus states can only end up in the rebirth of nationalism and imperialism within Europe. The mutation of EU into a Germania&Associates Union is far more dangerous for Europe than eurozone’s debts and deficits.

    • Europes surplus countries will end up like the PIIGS, if the Euro is no broken up into at least 2 currencies. If the politicians do not get it, the market will get them rather sooner than later.

    • Dear Knut34,

      You are so right and so wring in the same breath. Right in the sense that, if Europe continues on the present path, the surplus countries will run out of steam, the deficit countries will be pushed into a Third World state and the whole of Europe will go into a sharp decline. But you are also wrong to think that splitting the surplus from the deficit countries (by means of two different currencies) will avert Europe’s steady decline. Such a bifurcation will lead to a massive appreciation of the ‘northern’ currency that will push the surplus countries into a major recession from which both they and the deficit countries will suffer (although the latter will be somewhat protected by the large depreciation of their new ‘southern’ euro. Of the two scenaria the former (a plit of the eurozone in two) will, paradoxically yer surely, cause more suffering in Germany than it will on Greece. In short, I agree with you that the present path is the most catastrophic for all of us. And I disagree that a neat separation offers decent prospects for Europe. While better than the current trajectory’s endpoint, the separation will prove a disservice to all of us. This is why I keep insisting on the third alternative: Re-building the eurozone in a manner that the deficits of the south prove a godsent for the surplus countries.

  • First the good points: Great name for your proposal, very Swiftian, particularly because , like Swift, it rather cheekily proposes an outlandish solution to the problem.

    The bad points: Swift solution is technically feasible , but yours isn’t

    You seem to confuse assets and liabilities: If the ECB repays the Greek bonds ( and for that matter any other bonds that are “transferred” to it) then these bonds are a liability of the ECB and therefore it makes no sense to issue another liability to fund that liability: your accounts do not balance.

    Maybe what you are saying is that the ECB will refund the bonds that are being ‘transferred’ to it, but then these bonds are assets of the ECB and they are still the liability of the Greek ( or other governments that chose to ‘transfer’ obligations to the ECB). Or maybe the transferred bonds will be guaranteed by the ECB , in which case they do not need to be funded. Or maybe they are repaid by the ECB and the ECB repays the Euro-bonds issued out of its own resources , and therefore makes a gift to Greece

    I do not know if the vagueness in your proposal is deliberate or just ignorance of basic notions of accounting.

    There are a number of other misconceptions in here.

    Just randomly, note that the exposure of the ECB to the Greek debt is around 45 Billion from the SMP plus whatever amount of Greek government bonds deposited by GREEK BANKS as collateral at the refinancing operations (MRO and LTRO). And off course this exposure is mutualized between the ESCB members.

    Finally its funny to see that you are supporting the exact same solution to the problem that the Hedge funds and the ‘markets’ and traders in London are hoping for : Eurobonds. (BTW Eurobonds could be a solution later but after the current amounts of debt have been cleared)

    Also , you seem to have this notion that all the “xenoi” are against Greece, since you still seem to confuse the positions of the ECB and these of Germany , although the differences between the two have recently come out in plain view( letter of 06/06 of Schauble and the Trichet conference this afternoon)

    Your political economy position is actually correct, the the ECB/euro system is essentially controlled by the rentiers, but its a pity that the practicailities of what you are saying are so much of the mark.

    Cordially

    • Angelos:

      Let’s not complicate things unnecessarily.

      Greece (at this particular juncture and similar to the last two years or so ) needs, say, a 2% cost of funds for a 3-5 year period so that it can meet its debt rollover obligations. The purpose for this temporary measure/mechanism would be to get the economy going leading to easier access to capital markets – a solution not currently available.

      You can do that in a number of ways either via direct loans to Greece or in a more egalitarian way (because certainly other EU members would like this mechanism) as a Eurobond.

      Let’s not get into minutiae because it defeats the essence of the problem and its rather easy solution.

      The difficulties here are neither of economic or accounting nature. They are purely political and they have to do with a clearly disfunctional relationship between the ECB and Germany.

      Germany refuses the Eurobond solution claiming it will drive its borrowing costs up. There is an easy solution to that too. Let those EU countries which will benefit from the Eurobond structure (in other words obtain better rates that they currently have) band together and reimburse Germany’s increased cost on a proportionate basis.

      I am sure that the added premium for the EU beneficiaries under such Eurobond situation will far outweigh the costs otherwise. This way we have both EU members getting the benefit and Germany reimbursed for any increased costs. A classic “win-win” situation.

    • Dean

      Not so sure what you are talking about when you say talk about the dysfunctional relationship between the ECB and Germany since, at least, on the issue of the Eurobonds they are both against (http://www.ecb.int/press/key/date/2011/html/sp110321_1.en.html have a look at the last paragraph).

      Incidentally, the ECB being a monetary authority it would be outside its mandate to even have a position on Eurobonds, and indeed the ECB did not have a position on Eurobonds before , as Trichet said in December 2010.

      As for your idea about people with bad credit reimbursing people with better credit it seems a bit nonsensical so no comment on that.
      I won’t go into the technicalities of pricing Eurobonds and its many variants (EFSF, EFSM or even EIB in a sense) since technicalities seem to be unimportant for this blog, but just take my word for it, its not a “win win”, its more closer to a zero sum situation.

      So, if the so called “modest proposal” is a version of the Eurobond solution its neither original nor modest. Its simply a fiscal transfer, and of course its not “revenue neutral” (whatever this particularly vague term might mean). Lets call a spade a spade.

      The funny thing is that people that support Eurobonds today do not even understand what they are doing: they are simply letting bondholders of the hook.
      For some of us that fought against the Irish blanket guarantee and the bail out of the bondholders of Irish banks to the detriment of the irish taxpayer this is a particularly painful idea.

      In the same time the latest German proposal of keeping private bondholders in for an additional 7 years is making sure that private money will share the burden of the inevitable Greek default. So Greece should actually be supporting the recent German solution, but I guess the ‘experts’ do not seem to understand what they are talking and what they are hoping for.

      BTW the “60-40”, “maastricht complaint” Eurobond solution is a pure neo-liberal solution , first publicly proposed by Bruegel (the “bleu debt – red debt” crap) and its no more that a back door austerity straitjacket of Germanic inspiration: Again , be careful of what you wish for.

      Finally, there are solutions , but most people seem to bark up the wrong tree, mixing nationalism , parochialism and sloppy analysis.

    • Dear sir,

      Maybe you do not have the time to be actually writing in this blog, but I will dare a question, although not an economist myself. You write:
      “If the ECB repays the Greek bonds (and for that matter any other bonds that are ‘transferred’ to it) then these bonds are a liability of the ECB and therefore it makes no sense to issue another liability to fund that liability”
      Then, in the last phrase of the next paragraph you say exactly the same, but with another conlusion:
      “Or maybe they are repaid by the ECB and the ECB repays the Euro-bonds issued out of its own resources , and therefore makes a gift to Greece”

      As I understand it, what happens is …your first “guess”:
      “ECB will refund the bonds that are ‘transferred’ to it, [..] and bonds are assets of the ECB and they are still the liability of the Greek (or other) government”.

      The point of the transfer is that the ECB can refund/refinance them at lower interest than Greek/other government can. The result is that sovereign debt to private banks (the so-called maastricht complaint part) is financed by the private sector with interest paid to the ECB. The only “trick” here is that the EU/ECB allow for the same handling of sovereign debt as the US/FED, that is re-financing at low interest rates. In fact this is a much subordinate settlement, since Greek/other government is still paying amortization at the original (high) inerest rates (if I understand correctly Mr Varoufakis proposal) and refinances the capital at interest rates close to that of ECB bond rates. (As a comment here, this alone would be a mild neo-liberal approach, but Mr Varoufakis proposal also calls for other things.)

      So, there is no actual critisism in your comments, but only word-use comments that I cannot tell where their source is in that written by Mr. Varoufakis. Am I wrong somewhere? Is there another purpose in your view that Mr Varoufakis has “this notion that all the ‘xenoi’ are against Greece”?

      Thank you for your time,

      Stamatis Kavvadias
      Computer Science PhD

  • Thank you Yannis for importing the most fresh ideas to discussion of the debt crisis! I am sure that a lot of people including me are following your every day efforts at the “diplomacy” field and the non-stop re-adaptation of the modest proposal to the state-of-the-art of the european momentum.
    Having read your last paper of the modest proposal, I still have a couple of questions that I would like to ask you.
    First, I am wondering whether the issue of Eurobonds by the ECB for the covering of the 40-60% of the greek debt would still be in any case risk-free for the ECB itself. Is there enough surplus in the world economy this time to be easily invested to such bonds, especially if the -not so market friendly- purpose behind this is prior known to investors (as well as the deal for the very low interest rests for the old state bonds)? If yes, could you give us a clue who would such an investor be ?

    Second, I am not quite sure I understood how the transfer of 60% of the european debt to ECB, still compatible to the Maastricht treaty, could take place. Should it concern only Greece, or the PIGs, or it could potentially embrace all EU countries? This question also correlates with the first; would it be in any case technically possible for the ECB to overcome, for instance, an immediate charge of 60% PIG’s debt, or this debt should be taken in charge by ECB gradually?

    F.

    • Dear Henry,

      On the first question: Before I begin, let me remind you that the ECB is well and truly immersed in risk, as we speak. This is why Mr Trichet is kicking and screaming when he hears the word ‘restructuring’. The current path, on which the eurozone is walking, is frought with risks. With this thought in mind, let me say that the Modest Proposal’s Policy 2, which envisages as tranche transfer and the issue of eurobonds, minimises the ECB’s risks. First, because it effects a significant diminution of the debt mountain without defaults or haircuts or restructuring. Secondly, because it creates a new, highly liquid market in euro-denominated paper. Will there be enough buyers for the eurobonds that we envisage? You bet there will. Do not forget what a Crisis is: It is a period of symbiosis between two types of surpluses: A labour surplus (also known as unemployment) and a capital surplus (as monied people and institutions cannot find ways to invest their money in a manner that gives them safe, decent returns). Who are the potential buyers? They are the sovereign wealth funds (Chinese, Norwegian, Arab etc.), pension funds, privateers (including Europeans), all these people who have had enough of having to put all their eggs in the US Treasury Bills basket. In short, the world is replete with money seeking eurobonds to buy!
      On your second question: The debt tranche transfer should be open to each and every member of the eurozone, on a voluntary basis. In other words, any member state will have the opportunity to transfer its Maastricht compliant debt to the ECB. The ECB then takes it on its books forthwith. This does not, of course, mean that the ECB will have to issue an equivalent sum in eurobonds at once since it will only need to raise capital from the international markets when and only when the transferred member-state bonds mature – a process that will take years to unfold.

  • In today’s interview with the team of S. Kouloglou (TVXS), you were asked whether the proposal you and S. Holland formulated has any allies that could promote it on a European level. In yesterday’s parliamentary debate, the head of SYRIZA, Alexis Tsipras, seemed to advocate your proposal. I wonder whether this might be a good moment to effect a scientific rapprochement with those colleagues of yours who are more overtly on the political Left. This would no doubt produce a powerful tool in any progressive reform agenda.

    Do you see any room for such an attempt, or are your views so incompatible with those of Dragasakis, Lapavitsas, Kazakis, etc?

    • I am glad that Alexis Tsipras has adopted much if not all of the Modest Proposal, This is not an acccident: He and I have discussed it extensively. As I have with a number of politicians and trades unionists. E.g. with Kyriakos Mitsotakis, who also showed a deep appreciation for the proposal, or the Greek and European trades unions who have, in fact, adopted the Proposal officially. My concern is that, at this dangerous juncture, the Proposal does not become identified with one particular party or wing lest it become a party political football. Regarding the colleagues that you mentioned, let me say that consensus is not always desirable. Mr Kazakis utilises false data (whether intentionally or not I canot tell) in order to stir up a frenzy of anger that, he thinks, may give his agenda a lift. It is my intention to oppose such dangerous populism with all my strength. As for the other two names you mentioned, I have the impression that Dragassakis and I share much common ground already. Kostas Lapavitsas is a colleague whom I respect and whom I have been trying to woe to my department for a while. We agree on manny, many aspects of the crisis but seem to disagree (even though we have not had, unfortunately, the chance to discuss our disagreements in person, on the optimal strategy to deal with the crisis. He thinks that exiting the euro is desirable whereas I consider such an exit to be inconsistent the main task in hand: that of minimising, long term, the number of victims claimed by the Crisis.

  • Many thanks for your reply and for your clarifications. On your attempts to approach like-minded economists despite the differences you may have, they are very commendable indeed. I also share completely your concern that the Varoufakis-Holland Proposal does not serve as yet another pretext for “party political football.”

    I am a little less sure, however, about the fear you express regarding the possibility that it “become[s] identified with one particular party or wing.”

    Engaged public intellectuals comprise a group that is already in a minority among intellectuals, if one looks at the plethora of their counterparts who function as apologists for one social/economic power group or another. Within this minority, there are two types of intellectuals: the first, exemplified not only by Mr Lapavitsas but also by figures such as Gunnar Myrdal and Rudolf Meidner, develop and advocate scientific solutions aimed at a direct formation of the agendas of specific parties or wings. The second type, exemplified perhaps by yourself and by former luminaries such as William Beveridge, prefer to express their political commitment by developing and advocating progressive solutions strictly from within the intellectual arena. Naturally, both partisan and non-partisan intellectuals are crucial for the promotion of democracy, freedom and justice.

    Once an overtly non-partisan intellectual produces a scientific proposal, it is sensible that he will submit it for consideration by all parties and all wings, from the right to the left. With respect to your proposal, no one doubts its non-partisan nature, as well as the fact that it currently constitutes a scientific proposal that has been officially adopted by the European and the Greek trade unions. The point is that, despite the well-meaningness of individual politicans such as Mr Mitsotakis, only one Greek party seems to concur with the main thrust of your positions. Unfortunately, given the current juncture, the positions taken by other political parties, and –lest we forget– the interests of the constituents these parties represent, this is likely to remain so.

    Wherein lies the danger, then, in the identification of the Proposal as a constitutive element in the agenda of this party?

  • Today marks one year or three hundred and sixty five consecutive days that Belgium remains without an elected government

    I am quite puzzled how this fact was missed by the – otherwise – very independent and objective credit agencies

    Belgium has a public debt standing currently at 100% of GDP

    Had this science-fiction double whammy scenario occured in any of the PIG countries their bonds would have been declared mopping material by now…

    • In a sense, all our countries have lacked political government since the late 1970s. Come to think of it, political goods have diminished in value in direct proportion to the revaluation of financial ‘products’. Belgium is an excellent case in point. All that the credit rating agencies care about is neither the effectiveness of the (non-existent) Belgian government nor the actual level of the debt. They care singularly about the extent to which the Flemmish part can continue to produce surpluses that allow for the contant roll over of the Belgian debt.

2 Trackbacks