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

09/06/2011 by

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...

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