The Modest Proposal’s Most Controversial Recommendation Foreshadowed in the FT; plus Gordon Brown (former UK PM) and Sigmar Gabriel (SPD Chairman) adopting its main principles

In recent days, the Modest Proposal (click here for the Levy Institute version) has received a fillip from three different sources: The FT’s Lex (who argues that the ECB may well have to issue its own bonds), Sigmar Gabriel (SPD’s Chairman) and Gordon Brown (the UK’s former PM).

Exhibit A – FT’s Lex suggests today that the ECB ought seriously to consider issuing its own bonds

So, the most controversial part of the Modest Proposal is now openly discussed. Let me remind you that we have been strongly criticised for even daring to imagine that the ECB could ever issue its own bonds. The argument against the Modest Proposal has been, for a year now, that Central Banks do not issue bonds. Period. Our retort (see this recent post) has been that the ECB is not a Central Bank like all the others. It is exceptional, in that it has no counterparty in a European Treasury. And since a proper European Treasury (with the powers to spend, tax and borrow) is pie in the sky, ECB-issued bonds (the purpose of which ought to be the parallel transfer of the servicing of the Maastricht-compliant part of member-states’ debt to the ECB) are the only thing that stands between the eurozone and the cliff’s edge. Now, for the first time ever, someone else, other than us, dares make this suggestion. Below I quote from today’s Lex (since it is only available to the FT’s Premium Subscribers):

“The bond-buying is political; the ECB is using its credit and creditability… [What it does amounts to]… an interest rate subsidy, it is also a cross-border transfer of wealth, the ECB’s equivalent of the EU’s regional development fund (set up in 1975). Hence this is a further small step towards a single fiscal eurozone. There could be a bigger step to come. The ECB might have to issue its own bonds to sterilise the money it is printing to buy sovereign bonds. Such bonds, ‘true eurobonds’, might face legal obstacles. Politicians and voters could well object. But the story of the eurozone crisis has been one of jettisoning lesser principles – the ECB’s credit standards and political independence; governments’ fiscal autonomy and democratic accountability – for the sake of keeping the single currency, and the Union, alive.”

Exhibit B – Gordon Brown’s adoption of all three tenets of the Modest Proposal

Readers not familiar with the Modest Proposal ought to first read either the full version (or this summary I prepared for Die Zeit some time ago) in order to compare and contrast our points and recommendations to those in Gordon Brown’s recent article. Exceedingly briefly, our point has been, for at least 18 months, that the Euro Crisis is:

(A) Essentially, a banking crisis

(B) It is the result of a chain of banking and sovereign insolvencies that cannot be dealt with by means of loans from the surplus nations to the insolvent peripheral states. This is why every attempt by the EU to solve the crisis by subjecting the insolvent states to more loans and deeper austerity is bound to fail (as it has failed)

(C) Requires a combination of (i) forceful bank recapitalisations at an EU level, (ii) a transfer of 60% of GDP (the Maastricht compliant debt) to the Centre, courtesy of genuine eurobonds (our suggestion is that it is transferred to the ECB which must, in turn, issue bonds in its own name), and (iii) a growth strategy that will get Europe out of the mire, end its introspection and help it become a responsible global citizen that contributes to global growth (as opposed to a free rider that rides on the coattails of Chinese stimuli and US quantitative easing).

Now, read Gordon Brown’s piece here or peruse the following quotations from it:

[L]ast month’s Euro summit of 2011… will be seen as a huge missed opportunity, the turning point at which history failed to turn. And, in my judgment, the Euro leaders will soon be back in crisis sessions.

[T]he wrong conclusions arose from a wrong analysis.

Over too long a period it has suited European leaders to believe that theirs is a fiscal crisis in the weaker states, and so they have analyzed their problem in just one dimension: profligacy in the periphery demanding tougher and tougher austerity.

But Europe’s problems can only be truly understood in three dimensions: not just as a fiscal crisis but as a pan-European banking crisis — which started as, and continues to be, one of massive unfunded bank liabilities — and as a trans-continental crisis of low growth, in part the result of the euro’s deflationary bias. Together, and in lethal combination, these three problems threaten to create a tragic roll call, year after year, of millions of European citizens unnecessarily condemned to unemployment in a wasted decade…

At moments of crisis, statesmen and women have to lead markets and display irresistible resolve. The best example is when, pushing uphill against the constraints of the day, Roosevelt’s new deal of the 1930s turned orthodoxy on its head and pursued stimulus instead of austerity…

Europe needed to summon up the power to restructure its ailing banks, coordinate monetary and fiscal policy and radically reform the euro, removing its structural barriers to growth…

The funding needs of Italy, Ireland, Greece, Portugal, Spain and Belgium just to 2014 could be around four or five times as much as the current €450m backstop facility. This could require, at a minimum, credit enhancements to help restore market access at bearable levels, or cover of up to €2 trillion (approx. $2.83 trillion). On top of this, bank restructuring may cost as much as €200 billion in new capital, and perhaps even €300 billion (approx. $425 billion). This would require an overall backstop… equivalent to a quarter of Eurozone GDP.

Then we will also have to create a European debt facility (perhaps for up to 60 percent of national GDPs) and, as a sequel to that, greater fiscal and monetary coordination… But, even if all these stabilization measures are agreed, Europe’s growth will remain anemic and, far from falling according to plan, deficits and unemployment may remain too high… [W]ithout that agenda for growth, even the most painful of austerity measure is unlikely to prevent the social tragedy of high unemployment.

Exhibit C – Sigmar Gabriel (SPD Chairman) calls for eurobonds

The FT today also reported the following: “Sigmar Gabriel, SPD chairman, on Tuesday promised his party’s support once again, and argued that the German government should go further, and allow eurozone bonds to be introduced, ensuring easier borrowing for the most debt-strapped eurozone member states.” Of course, this statement underplays the importance of eurobonds. The point is not to make borrowing easier for peripheral states. The point is to rationalise debt management at the eurozone’s level and to arrest the negative dynamic (see here for a graphical representation of the latter).


  • Just a matter of time until we all see the light. Eurobonds it is.

    • How many of these precious Eurobonds do I get for my old bicycle? Maybe the ECB will soon trade cow manure for cash….

  • What the ECB does and not will soon not be of interest anymore. It has lost its credibility.

    German coalition MEP says: “With these “inflationary” policies, the ECB is putting people’s
    savings at risk. If it sticks to this course, the ECB will soon buy old bicycles in return for new paper money.”

    No wonder gold is sold out n Germany. Domestic cash plus bank depositis could buy around 50.000 tons. Total world federal reserve bank gold is about 30.000 tons.

    • But the ECB’s policies are not inflationary. Screaming it on the German press will not make them so either.

    • >>>But the ECB’s policies are not inflationary

      Thi is like saying “jumping off a high rise building oes not kill people”.

      The problem is the landing.

  • Momentum is growing: Ruud Lubber, a former Prime Minister of the Netherlands, also issued a strong statement last night at “Nieuwsuur”, a news program on national television, towards having a more structural solution at european level including having eurobonds.

  • Dear Yanni,

    first off, I am not an economist, so my thoughts might turn out to be too naive.

    So: I wonder if fiscal policy answers suffice to mitigate the crisis we’ve been experiencing the last 3 years. Suppose in three weeks from now our northern leaders decide to set aside their populist agenda and follow a program along the lines of the modest proposal. Assume, in addition, that in the next month leadership on the other side of the Atlantic manages to shield decision making from the cries of newly arrived zealots, and decides on a program of wide public spending and even increased taxation. Would all this quiet the markets down? Would they be able to judge that the long term economic prospects are (probably) no longer bleak?

    I have a suspicion that not. It actually looks like the markets are currently in a state of amok and every piece of news they receive is driving them to new depths of despair -quite like the jealous wife who sees evidence of infidelity and disaster both when her husband brings her flowers and when he brings nothing home. The irrationality by which they normally operate has been blown out of proportion and one has to wonder whether there is any stopping the downward spiral. Who’s to say this can, or will stop now? Who’s to say it will not repeat in five, ten, twenty years?

    So the question(s) I have is (are): are modest proposals, of any kind, enough? Do we have a viable financial system on a global scale? Why is reliance on market borrowing and all the speculative trading still the golden standard by which we do business? What are the pitfalls of imposing, for example, a large tax on speculative trading? Would that somehow derail the financial system, or is it simply lack of political will and of powerful enough centralized financial institutions to fill in the gap (e.g. ECB)?

    It is more than two years that the Economist was declaring the “End of laissez-faire Capitalism” on its front cover. It looks like this “End” will soon join the “End of History” in the big book of fairytale endings.


    • Briefly, the adoption of the Modest Proposal will not turn European capitalism into an angelic crisis-free zone. But it will put an end to the domino effect that presents a clear and present danger to the eurozone’s very existence. The aim presently is to make Europe as problematic as the US, Britain, China et al. That is, to remove a malignancy that is uniquely present in the eurozone. Then the real debate on what to do with a capitalism that finds it hard to regain its poise after 2008 can resume.

    • What do people (not corporations) outside the countries that are a “problematic zone” care? Why should they vote for parties that put the burden of irresponsible, poor, corrupt or all three.

      Only nationalists who want peace in Europe to come to an end would want to socialize the debt and problems of irresponsible, poor, corrupt countries.

  • GOLD shines like Never before!
    Latest Greece piling up newGOLD reserve from IMF money.Desperation lingers on.
    German DAX fell like stone on rumors of FRANCE losong top Rating!
    The answer maybe coming from several independant sources in UK,Germany
    with distinguished politicians expressing in favour Modest Proposal like solution.
    Maybe now time to rename this Yanis creative Proposal with high probability realized soon
    as a first step towards a European Fiscal Federation with own TREASURY.
    PAN EUROBOND TREATY 2011 paving means to stabilize and recover economic
    Market confidance restored finaly. A brighter future for also peripheric countries most
    affected by present ongoing crisis turmoil tuned from RATING INSTITUTES MALAISE
    running the show applauded by wicked MARKET PARTICIPANTS.
    A strong Europe forming a total OLD CONTINENT REVIVAL emerges now prepared to
    enter the NEW GLOBAL PLAN challenges ahead.


    • Headline in German newsapers: “Greece is piling up gold with our money”

      The press starts to turn away from the pro Euro fanatics. Any pary that supports bailouts will commit suicide.

      To be honest I do not care. I will vote for any any party that is against Socialism, Eurobonds, Bailouts etc. And if it is the NDP so be it. If we have a new war in Europe I will go to South America. I do not need this crap.

  • Dear Knut, I assume you are German or maybe Austrian, nevertheless, brace yourself and pray that it works (the eurubond) or else pretty soon you’ll get nothing for your dear old bike.

    Pretty sooner than we all think actually. Ask the French. They might have heard something.

    • I prefer a crisis with uncontrolled bankruptcies all over the place over a debt union. The reason is very simple . In a debt union there is no control for the individual countries. It does not really matter how they improve. They will always get screwed by the ones that are not capable or not willing.

2 Trackbacks