American Common Sense on Europe: The NYT largely adopting the logic of the Modest Proposal, and even Jeffrey Sachs making sympathetic noises

For some time the rest of the world has been finding it hard to follow the passionate infighting in the US over the federal budget. Only two years after Barrack Obama’s landslide, the United States became, effectively, ungovernable. The current standoff regarding the mystical (to non-Americans) debt ceiling causes a mixture of consternation and incredulity in most people’s minds. And yet, America remains the source of common sense; at least when it comes to… Europe. While European leaders are in complete denial over the systemic aspects of the euro crisis, choosing to focus on Greece as if the problem is one of mere ill discipline, many influential Americans seem to  have a much better handle on Europe’s conundrum than we do here in Europe.

This morning’s New York Times editorial is a case in point. In a few, well considered sentences, it captures the heart of the matter:

“Waiting accomplishes nothing. In two months, there is every likelihood that Greece’s debts will be larger, private investors more skittish, and interest rates higher… Greece’s debts will keep rising as interest rates remain very high and its economic growth very slow. Greece now pays more than 20 percent for private lending and more than 5 percent for European bailout money. Its economy has been shrinking for a third straight year.

Lower interest rates and higher growth rates are the key to avoiding default.”

So, what remedies do the NYT suggest? One of the three policies of the Modest Proposal, is the answer:

“One quick way to reduce interest rates would be to issue new European bonds to refinance much of Greece’s existing debt. The European Union, which has a good credit rating, can raise funds at between 3 percent and 4 percent interest.”

And what is stopping Europe from taking this sensible path?  As this blog has repeatedly answered: Europe’s political deficit! Or, in the words of the NYT editorial, “Mrs. Merkel, Mr. Sarkozy and other European leaders… are not even talking about this kind of approach. They focus instead on complex and dubious plans to disguise the losses of their banks. They insist against logic and evidence that private lenders will voluntarily participate in refinancing Greek debt. They still pretend that Greece is not slowly moving toward default. Such blinkered views do not help Greece, and will not prevent default or mitigate its consequences.”

Hear, hear!

Addendum: Jeffrey Sachs’ well intentioned idea

A few days before, Jeffrey Sachs published an article  in which he made similar noises. He is clearly following a good instinct but has not thought things through, at least not as clearly and comprehensively as the editors of the NYT seem to have. He seems to be suggesting a Tobin tax by which to  subsidise Greek interest rates. This well meaning suggestion is fundamentally flawed for two reasons: First it does not recognise that this is  a systemic crisis and that Greece cannot be lent cheaply when Ireland, Portugal, Spain etc. are snowed under mountains of debt. Secondly, he neglects that a Tobin tax will never be enacted in the eurozone while the City and Wall Street are exempt. Still, by the standards of conventional economists, Sachs is ahead of his pack.

PS. If you really want to see up close the poverty of modern conventional economics, listen to this exquisite Radio 4 program (In Our Time, by the infamous Melvyn Bragg) on Malthusianism. Notice that no one on the panel is an economist.  An act of negligence on the program’s producers? Of course not. For there is no mainstream economist that could add a penny’s worth to the discussion. Sad but true!


  • You got it! The whole world is on to the German nonsense.

    And all of this pretending that Germany is a friend of Greece. Merkel is a traitor. End of story.

    • Wow, this great EURO proejct really brought peace to Europe. Let´s get rid of this miconstructed worthless currency before we all fo to war again!

  • Both continents are suffering from political myopia.

    I have a modest proposal too. Send European politicians to the USA to solve the idiotic self-wounding debt ceiling problem, and then send American politicians to Europe to deal with bank and sovereign insolvencies. There, FIXED.

    One thing however: since I can never trust the banksters, I always wonder whether bigger American and British banks are waiting to scarf up smaller European banks in distress at firesale prices. Wall Street may very well give the EU the very treatment the EU intends for Greece.

    • My sentiments exactly.

      Everythings points to the same actions all over again.
      They will attack other countries and then their own.

      Who cares about people?
      Lemmings. But the lemmings grow teeth.

  • A Sisyphean journey!

    50 bln of debts are already on the books of ECB. The only bank that bought large amounts of Greek bonds in the past 18 months. There are another 48 bln that the government owes the Greek banks, with a remaining total sovereign debt of 237 bln.

    Let us look at one example, Germany sent a total of 8,4 bln to Greece, well to be correct, they sent it to Frankfurt first, to the HQ of ECB, and from there it goes to the Greek Central Bank. The CB forwards it to the department of finance, and then it starts traveling again. Some money goes to the National Bank of Greece, Piraeus Bank and EFG.

    The agency in charge is the PDMA, the debt bureau of Greece. They are responsible to transfer the money they received to the owners of the bonds.

    The by far largest amount of money the PDMA transfers these days goes to….?

    You guessed it, ECB!

    A Sisyphean compound cycle with interests attached.

    Is there no way to drag Mr.Trichet in front of a european court? This is not a central bank anymore!

    • You forgot about the part that Germany dumped at least half of its Greek debt into the lap of the ECB(over the course of the last year) in clear violation of the prior agreement with the French and other holders of Greek debt NOT to do so.

      So, after your shameful Germany dumps half of its load it then comes out and demands private sector participation when clearly it has figured out a way to limit its damage and cover Germany’s losses.

      And then you expect us to treat Germany as the leader of Europe. Shame on you and your tricks. Shame on Merkel and her amateurish government.

      Now, check out our response. We are gonna take you to the cleaners and teach you a lesson in the process. And there will be no prisoners!!!!

  • As for Austerity, take note of this IMF paper!

    This paper investigates the macroeconomic effects of fiscal consolidation in OECD economies, and assesses the evidence regarding the expansionary fiscal contractions hypothesis.

    Result: There is no evidence that the austerity policies will create economical growth!

    Come on now, really?

    Surprise surprise!

  • Soem good news for a change: The upper house of the German parliament required to have a say regarding the ESM. This is the beginning od the end to the ESM. The bail out crew from Brussels will have to find a new topic to work on. Maybe getting rid of bureaucracy in Brussels would be a good start.

    • Knut34:

      This is completely irrelevant.

      In 2009 the bulk of the Greek debt in private hands. Today 37% is the responsibility of public institutions like the ECB and the IMF. With each section of the European bailout given to Greece, reduces the weight of the debt of banks, and private funds, and increasing the share held by European public institutions. It is estimated that by 2015 this share to be increased to 56%, while banks have only 8% and 11% private insurance.

      Instead of addressing the problem with a strong Greek restructuring, finance ministers from the EU and the European Central Bank to win playing time. That time is devoted to altering the structure of the Greek debt through its nationalization by the European taxpayer. Europe is putting public money into a debt for which payment is more than problematic. The only sense of the operation is to continue subsidizing the financial sector.

      This nationalization of the risks has been made-up in Germany by the rhetoric of “private sector involvement in the rescue of Greece”, which incidentally served to prevent the Bundestag voted against a second package rescue Greece, which would have been impractical for the government. In his letter of June 6, Schäuble proposed to extend the maturity of seven years the Greek debt and involve the private sector in order to rescue “at the end the European taxpayer does not end up taking over everything.”

      “We must try to end the little game whereby they pocket the profits and when things go wrong, taxpayers pay,” Schäuble said in an interview with Bild am Sontag . But the popular will “bring into line the banks” is just a comedy. A comedy devised and originated by the first German bank, representative of a sector that emerges from his Greek transferring risk to the public sector.

      The result has been a resource of the German financial sector to restore image with little outlay, which was in tune with the interests of the Berlin government to overcome a difficult vote in the Bundestag, determines a European debate on participation the private sector that the Prime Minister of Luxembourg Jean-Claude Juncker, described as “playing with fire.” Juncker warns of the risks of contagion from the Greek situation in Ireland and Portugal, with harsh implications for the debt of countries like Belgium, Italy and Spain.

    • It is better to have a scary end than scare without end. Greece is about as important to German banks as it is for for German exports. It is a rounding error.

      Yet much time and money is dovoted to do what you say. Let the banks get rid of the worthless paper and move it to the taxpayer. Banks lobby and talk about contagion. Where was the domino effect when the follwing countries went belly up:

      – Iceland 2008
      – Argentina 2002
      – Russia 1998

    • @Knut34
      Interesting that you brought up the Russian collapse of ’98.
      Not sure how many people outside of the financial markets are aware of this but LTCM (a very famous and extremely over leveraged hedgefund at the time) had to be bailed out by intervention of the federal reserve bank of NY as a result at least partially of the Russian collapse. It forced private investment banks to come up with over 3.5 Billion USD to save the fund and not cause a systemic risk for the whole financial system. Unfortunately that event was not enough to raise concerns at the time, on the lack of transparency and regulatory oversight of the OTC derivatives markets. Brooksley Born who was the head of the CFTC at the time was desperately trying to raise attention to this regulatory gap but the voices of Greenspan, Summers and Rubin who had most of the congress with them at the time were significantly stronger than hers. If that had been properly addressed back then, many people agree that we may have avoided a big part of the catastrophic collapse of the markets in 2008

  • This Merkel cacophony and the bad German theater are now revealed piece by piece:

    “Soft Failure” of Greece was the idea of ​​Deutsche Bank

    The proposed “soft bankruptcy ” to Greece with voluntary participation of banks in bailout , presented by Germany earlier this month and are now at the center of heated debate on the European crisis euro , were the work of Deutsche Bank . The lines of the letter sent on June 6 the European Central Bank and Ecofin by German finance minister, Wolfgang Schäuble , were made by the leading German bank, under the direction of his boss, Josef Ackermann .

  • In light of recent events, it’s hard to believe Europe is ready for further integration. If too aggressive policies are pushed now, it may well be the end of EU as we know it. I like the modest proposal, although i would like to see some sort of lasting direct job creation scheme in it. That might not be politically feasible, though.

  • I’m having a really good laugh. That IN OUR TIME podcast came over the internet just as I came to the bit on Malthus in MODERN POLITICAL ECONOMY! Cheers from the U.S. of the Debt Ceiling.


  • I think your every good indeed and always listen to your interviews with Doug Henwood.

    But why do you call Mervyn Bragg “infamous”? Why is he “infamous”?
    Compared with most people that appear on the BBC, he’s not so terrible, surely.

    • I meant it tounge in chick, as a great fan for many decades (going back to the South Bank Show). Having said that MB has been known to stir up powerful controversies and to ruffle the feathers of his invitees (not always fairly).