12 Comments

  • I was with you up until you brought forward the Eurobonds issue.
    Please answer Keiser’s last question about the creation of a Euro Bond:
    How does adding more debt resolve Europe’s debt problem?
    Who would present a credible guarantee for these Bonds?
    You sound like the Eurocrats who having failed are clamouring for more power.

    • Dear Patrick,

      You will find the full rationale in our Modest Proposal for Resolving the Euro Crisis. See http://varoufakis.files.wordpress.com/2011/04/ceb1-modest-proposal-2-2-6th-april-20111.pdf

      But let me take your points one at a time:

      “How does adding more debt resolve Europe’s debt problem?”

      It does not. But this is not what I proposed. Indeed, the eurobonds that we suggest will (A) reduce aggregate eurozone debt by about 30% and (B) end the domino effect that creates the momentum which causes one state’s insolvency to cayse the next to go under. To see the point in terms of a simple allegory, suppose Jack and Jill, a young couple, have a mortgage which they find hard to service because the interest rate they were charged was high due to their non-existent credit history. Suppose further that Jack and Jill’s parents, courtesy of their good credit history, can get a loan at considerably lower interest rates. They could, if they wished, take a loan equal to Jack and Jill’s outstanding debt, repay the whole lot and then have Jack and Jill make the monthly repayments – at the considerably lower interest rate. This is not a case of adding debt to debt but extending a conversion loan that, in fact, reduces, Jack and Jill’s intertemporal debt (capital plus total interest due).

      In exactly the same way we suggest that the ECB undertakes to service a portion of the eurozone’s member states’ debt equal to 60% of the eurozone’s GDP. The money to do that will be borrowed by the ECB through the issue of its own eurobonds, which it will guarantee itself, but will be repaid (just like Jack and Jill repay the loan taken by their parents) by the member-states. How? The ECB, at the time it issues eurobonds in order to service a maturing, e.g., Italian bond, debits Italy with the sum that the ECB has just committed to pay to the holder of the eurobond it just issued (on Italy’s behalf). That way, the average interest rate for the eurozone’s Maastricht compliant debt (60% of GDP) will fall from around 5.3% (its current level) to considerably less than 3%. In this sense, just like Jack and Jill’s intertemporal debt will have shrunk by means of their parents conversion loan, the eurozone’s total debt will diminish in one go.

      Then you ask: “Who would present a credible guarantee for these Bonds?”

      The ECB itself. Note that the eurobond issue, as described above (Policy 1 of our modest Proposal) is revenue neutral: In the long term, it will be costing the ECB nothing. Zilch. You may, of course, ask how the ECB (and the markets) can be so sure that Italy and the rest will honour their long term debts to the ECB (the equivalent of how Jack and Jill will make their payments to the bank after their parents have taken out a new loan on their behalf). Simple: The ECB has a great deal of clout over member states, courtesy of the complete dependence of the member states’ banks on the ECB for liquidity. Moreover, the member state debt to the ECB could be given super-seniority status, just like that of the IMF’s. Lastly, the market will be factoring in the ECB’s capacity to monetise its debts, if it comes to that. The ECB will never have to do this, under our proposal. But knowing that it can adds a powerful boost to the ECB’s credit-worthiness.

      Lastly, you conclude by commenting: “You sound like the Eurocrats who having failed are clamouring for more power.” Europe needs more centralisation if the euro is to survive. You may think that the euro does not deserve to survive. As someone who opposed the creation of the euro staunchly, let me tell you that it is one thing to argue that the euro ought not to have been introduced (the way it was) and quite another to propose that it is allowed to collapse. Its collapse now would push Europe into a sustained recession the likes of which we have never seen. And, in consequence, it will bring the rest of the global economy down with it. As for our pathetic eurocrats, the bone I want to pick with them is not that they want more power. My problem is that they seek more power and then waste it spectacularly.

  • In the point of dispute if the shortsightedness of the german elite is accidental rational idiocy – the Varoufakis position, or voluntary motivation aimed at ulterior gains from a weak euro- the Keiser viewpoint, i tend to agree with the former since, to borrow Jason Manolopoulos analysis, “not a single constituency emerges well from this story, including Greek politicians, Greek society, trade unions, leaders of the European Union, the I.M.F., the world’s investment banks — each and every one has scarcely put a foot right in a collective display of hubris, miscalculation, overambition, deception, mis-selling, folly and, in some cases, sheer greed in a saga that has continued for decades.”

  • Dear Yanis,
    Thank you for your reply and the Jack and Jill metaphor. I am thankful for it because as the saying goes: you explained it for a 10-year old (my economics-unerstanding age), now can you explain it again as if I were a 5-year old.
    Correct me if I am wrong, but despite their poor credit history did not Jack and Jill, when they join the EU, get the same low interest as their parents? Only their profligate ways led to higher interest rates.
    Also, in your metaphor you predicate that the parents have a stellar credit rating which might not be the case.
    Is it not conceivable that lower interest rates will not solve their problem as the refi with a lower interest rate for homeowners in the USA who are underwater did not prevent them for going into foreclosure.
    What makes you think that a government sponsored entity such as a European Investment Fund is better equipped than the free market to determine where the growth will come from. It sounds to me like a Soviet gosplan and we all know how this ended up.
    Finally, as you say it’s a systemic problem, but not limited to Europe. The derivative global problem, I hear, is in the quadrillion domain. Who’s is going to pay for even a 10% default?
    Regards
    Patrick

    • >Correct me if I am wrong, but despite their poor credit history did not Jack and Jill, when they join the EU, get the same low interest as their parents? Only their profligate ways led to higher interest rates.

      Apologies for dismantling a nice metaphor but no. This is not what happened. Let me remind you that Spain had a budget surplus when the Crash of 2008 hit – and as low a debt to GDP ratio as Germany. Same with Ireland. Let me also remind you that, presently, Spain has a lower budget deficit, and a lower debt to GDP ration than the UK. And yet it has to pay interest rates 3.5% higher than those of the UK. Why? Because it is enmeshed in the problematic euro system.

      >Is it not conceivable that lower interest rates will not solve their problem?

      It will solve the problem of refinancing their debt. It will not solve the growth problem. This is why I support eurobonds. Not only because they help with debt management but because they have the capacity to unleash the European Investment Bank to effect an investment-led recovery at the eurozone level. See Policy 3 of our Modest Proposal: http://varoufakis.files.wordpress.com/2011/04/ceb1-modest-proposal-2-2-6th-april-20111.pdf

      >What makes you think that a government sponsored entity such as a European Investment Fund is better equipped than the free market to determine where the growth will come from?

      History. After all it was the Marshall Plan that gave rise to the industrial miracle also known as Germany…

      >It sounds to me like a Soviet gosplan and we all know how this ended up.

      Do not knock Gosplan. It had its successes. Its downfall came not because it relied on command but because it eliminated markets. The combination of Gosplan-like planning and markets gave us the Japanese and German miracles and have been underpinning Chinese growth today. Even in the US, if it were not for the military-industrial complex, a command driven economy within a market system, America would have remained an economic and political dwarf.

      >Finally, as you say it’s a systemic problem, but not limited to Europe. The derivative global problem, I hear, is in the quadrillion domain. Who’s is going to pay for even a 10% default?

      No one. For no default is necessary. What we need is to grow out of the debt trap. Just like the US did in the late forties and early fifites.

  • I wish people had listened to the Austrian economists when they warned that all this was coming. They warned about low interest rates,government spending, debts & deficits and much more. I laugh so hard at the people who say that the crisis is caused by capitalism. Get over it people! We never had genuine free market! Only the so called crony capitalism.

    I dont like to be a doomer but the worst are coming. The end of the Keynesian experiment is already here. Prepare…

    • You are so right: We never had pure capitalism. But do you understand why? Because pure capitalism is an abject impossibility. It would collapse before it got going. As for the Austrian prophets, do not forget that they are not the only ones to have prophesied the bust. Marxists have been doing it for much, much longer. Hayek’s great contribution was to explain succinctly why economists will never understand the markets. But when it came to really existing capitalism, he remained clueless all his life. By the bye, the Austrians’ most influential impact over the past thirty years was to provide deregulators (and all those who advocated Wall Street’s right to mint oceans of private money – also called financial engineering) with the ideological and theoretical excuse to set the scene for the financial bubble that burst so spectacularly in 2008.

  • Thanks Yanis for enlightning me and others (I hope!) on Max Keisers show. I will definitely try to follow your work as much as I can. Max tends to see ghosts although his heart is the right place 🙂

    I understand that you defend a eurobond solution with reference to the deep recession a break up of the Euro would create – let´s say that premise is true. Why is it so bad to recalibrate peoples understanding of real value? It´s called the business cycle in economical theory – a cycle that the mad politicians and the corrupt bankers since 2008 have tried to break – tried to break the physics of their own FIAT system. Going back to subprime etc.: Is it not greed, corruption and the lack of true market price discovery (if there is such a thing) that brought us here in the first place? We don´t consume what we need anymore but what we want or even what we are told by others that we have to have to succeed in the social game! That´s progress – that´s wealth – that´s valuable? In my book that´s just moral decay and such a lack of insight into one self is dangerous to others. Why persist with a system that promotes values that are so twisted? I simply don´t see why we need to keep growing GDP – for what? Because we will loose in the big global game of accumulating more capital? And capital is power – so we won´t be able to control our own destiny if we have less money than say China. That´s the real reason for all this GDP growth bullshit, is it not? Let it go Yanis – the system needs to crash to recalibrate.

    • We shall agree to disagree. We tried to let the system crash in order to recalibrate. The year was 1929 and the administration was that of Herbert Hoover, whose dictum was “liquidate, liquidate, liquidate”. Alas, markets do not have the capacity to recover from such busts without first giving rise to the worst forms of misanthropy; to the Hoovervilles, the xenophobes, the forces that crash a whole generation or two in the unyielding clasps of poverty and wrethedness. You may think that this is what the world needs now. I do not…

  • Prof. Thomas Staubhaar (Economics @ Harmburg U.) suggests:

    To meet these challenges, Europe needs to follow a six-point plan:

    ■First, under German and French leadership, the governments of the 17 countries making up the euro zone need to make it clear that they are prepared to use all the means at their disposal to prevent fellow euro-zone countries from going broke. At the height of the financial crisis in 2008, German Chancellor Angela Merkel and then-Finance Minister Peer Steinbrück demonstrated how to communicate such a message in a convincing way when they pledged that the German state would guarantee the savings of private German citizens.
    ■Second, this promise of support means that the euro rescue fund, the European Financial Stability Facility (EFSF), should be expanded without limits. Loans at cheap interest rates and with long maturities will be offered to any euro-zone country that needs it. But countries that want to refinance their debt using money from euro-zone coffers will have to give up something in return: part of their autonomy over their state finances. In real terms, this means having borrowers present their medium-term budgeting plans to lenders, raise certain taxes and abide by the stipulations of a debt brake similar to the one that Germany has introduced, which requires the government to virtually eliminate the structural deficit by 2016. The bigger the loan, the more autonomy lost. For example, euro-zone officials could even replace those of individual nations to perform duties such as collecting taxes and implementing plans to cut costs and privatize state assets.
    ■Third, the European Central Bank (ECB) needs to give up its role as the institution that comes to the rescue of countries in risk of default by buying up their sovereign bonds. The ECB is not a so-called “bad bank” for the bonds of broke countries that nobody wants to buy. Instead, it should focus on its most important mandate: managing the money supply so that prices stay stable. So far, it has performed this task well. Bringing debt under control is a matter of financial policy. It’s a problem that states should solve — and not the central bank.
    ■Fourth, the right thing to do is to transform the euro-zone into a fiscal union in which all members are jointly liable for each other’s obligations. If everything else has failed, but politicians — rightly — want to prevent the collapse of the monetary union, there needs to be a jointly financed stability mechanism that can supply emergency financial assistance in times of crisis. The EFSF should assume this responsibility. In order to prevent the crisis from spilling over into other countries, it should have the ability to buy sovereign bonds directly on the secondary market — in other words, from banks and insurance companies. Doing so would turn the euro zone into a so-called transfer union.
    ■Fifth, in order to free countries from the yoke of the ratings agencies, the agencies’ verdicts should be downgraded to the status of simple statements of opinion. They would then be viewed as something along the lines of a seal of approval handed out by consumer-protection agencies, but nobody would be forced to pay attention to them. In other words, whoever wants to listen to the pronouncements of those who analyze the creditworthiness of countries and companies can do so — or not.
    ■Sixth, the governments of the euro-zone countries should make it clear that they will not allow developments on global stock markets to dictate their actions. They cannot be allowed to make it their goal to influence the behavior of private-sector stockbrokers. However, they need to send out a clear signal that they are willing to keep public budgets in order over the long term and to make every effort to guarantee conditions that encourage growth, stability and the ensuing predictability. They also need to create more transparency and introduce tighter financial-market regulations. They should, for example, implement a complete ban on short-selling.

    • Sorry for the typo:

      Thomas Straubhaar is a professor of economics at the University of Hamburg and director of the Hamburg Institute of International Economics (HWWI).