Eurobonds that can work now! A critique of the European Commission’s Green Paper on ‘Stability’ Bonds, by Stuart Holland

Today, Stuart Hoilland and I are in Brussels to talk with euro-MPs about our Modest Proposal. My simple brief is to impress upon them that, at the eleventh hour, ECB-bonds are sine qua non for saving the euro-system. We need, in short, a simple and boring common bond that is guaranteed solely by the only serious eurozone instution there is. Stuart is bringing along, to our meetings, a fresh document in which he compares and contrasts our ideas to those of Mr Baroso’s Green Paper. Stuart’s document follows:

It is to be welcomed that bonds are on the Commission’s agenda and that the Green Paper addresses the manner in which they could lead to lower financing costs in the euro area.[1] It also has merit in proposing three variants of bonds as the basis for public debate. But the Green Paper is flawed in narrowing the scope of bonds for both stability and growth only to stability, displacing the Commission’s recommendation of Union Bonds in 1993 for growth and economic and social cohesion and neglecting also successive endorsement of such wider scope for Union Bonds or Eurobonds by heads of state and government.

The Green Paper also is flawed in that Angela Merkel has already rejected its proposals by repeating her claim that bonds are not a solution. One of the reasons for this is that most proposals for bonds depend on mutual guarantees by other member states which would mean their being underwritten by German taxpayers. YetGermanyherself is not immune from the crisis. She has just failed to gain a successful issuance of her own bonds in part because markets already sense that, without a more radical European solution,Germanywill need to underwrite those of other member states yet cannot, on her own, assure this.

This paper both critiques the Green Paper and proposes Twin Track approaches for Union Bonds to stabilise the crisis and Eurobonds to finance growth. It claims that this should be acceptable to Germany and other surplus Member States on the grounds that neither such proposal needs Joint Guarantees, Fiscal Transfers or Debt Buyouts, that a conversion of a share of national debt to the Union could be on an enhanced cooperation basis, and that Eurobonds for the recovery of growth would be funded not by German or other taxpayers but by inflows to the Union through their purchase by the central banks of emerging economies and sovereign wealth funds.

1. Displacement

The Green Paper opens with the claim that the concept of a European bond was first discussed in by Member States in the late 1990s.

“The concept of common issuance was first discussed by Member States in the late 1990s, by the Giovannini Group”.

It then refers to publication in September 2008 discussion paper issued by the European Primary Dealers Association (EPDA) of a discussion paper “A Common European Government Bond”.

To claim that there was no other discussion by Member States than of these two technical documents not only is wrong, but displaces the Commission’s own recommendation to issue common bonds – Union Bonds – in the Delors White Paper of December 1993 on Growth, Competitiveness and Employment. This then was discussed by the Essen European Council in the spring of 1994.Luxembourg and theNetherlands were in favour. Helmut Kohl, forcefully, and François Mitterrand, with reservations, were against.

But Mitterrand then changed his mind later in the year, when Michel Rocard had been briefed on the case for bonds by the economic committee of the French Socialist Party and called for a 50 billion ecu European Fund for Jobs, financed by bonds, at the autumn conference of the French Socialist Party. When questioned by the press on whether he supported this, Mitterrand replied:

`I agree with him completely, and would even go so far as to say – and I have checked this with the Commission this morning – that his figure could be doubled.  If 100 billion ecus were made available to develop a European infrastructure, we could show thatEuropecan be a key factor in promoting growth, work and jobs.’  (Source L’Heure de Verité, France 2, 25 October 1994)

Jacques Chirac then recommended action on the Delors proposals at his first European Council at Cannesin June 1995. Agence Europe reported him as submitting to the Council that Own Resources had been entirely absorbed by the CAP following exchange rate realignments and arguing for “expansion of the new financial instruments” (i.e. the Delors’ Union Bonds). 

Bonds again were on the agenda of the June 1996 Florence European Council, when only John Major and Helmut Kohl were against a decision to issue them. Both Jacques Chirac and Romano Prodi had called for them not only to finance growth and jobs but also to underpin what at the time was the projected single currency.

All of this was before the “later 1990’s” to which the Commission Green Paper attributes the “first discussion by Member States” of the common issuance of bonds, while their discussion of the Delors proposal of Union Bonds at European Council and Ecofin level continued thereafter with high press and media coverage rather than in the at the time unnoticed Giovannini Group, or a discussion paper published by the European Primary Dealers Association.

Such as when Giulio Tremonti gained discussion of common bonds in Ecofin on the lines proposed by Delors when in the Berlusconi government from June 2001, although Germanystill was opposed. As also in the call of Manuel Barroso and Tony Blair in Lisbonin February 2003 for bonds to finance a 10 year programme to create the 15 million jobs which was the employment growth target of the 1993 Delors White Paper.[2] As well as the statement by Manuel Barroso on the relaunching of the Lisbon Agenda that:

“It’s about growth and about jobs. This is the most urgent issue facing Europetoday. We must restore dynamic growth which can bring back full employment and provide a sound base for social justice and an opportunity for all”.[3]

2. Narrowed Parameters

The Green Paper outlines three different options for bonds, but has chosen to narrow the definition and role of bonds to stability rather than growth, claiming in a footnote that:

“The public discussion and literature normally uses the term “Eurobonds”. The Commission considers that the main feature of such an instrument would be enhanced financial stability in the euro area”.

Although the Green Paper recommends broad public consultation on the concept of Stability Bonds, with “all relevant stakeholders and interested parties”, it defines these as, in particular:

“Member States, financial market operators, financial market industry associations, academics, within the EU and beyond, and the wider public…”

No reference is made in these recommendations for “broad public consultation” to the  European Parliament, the Economic and Social Committee, the Committee of the Regions, to Social Partners or the resolution of the May 2011 Congress of the European Trades Union Congress in favour of bonds to achieve both stability and growth.[4] 

The word ‘social’ itself appears only once in the Green Paper in a footnote referring to the title of a document from the European Parliament. The words ‘employment’ and ‘cohesion’ do not appear at all. Other than in a reference to the Stability and Growth Pact, the word ‘growth’ appears once in submitting that lower interest rates could “underpin the longer-term growth potential of the economy”.

This neglects that low interest rates are not a sufficient condition for growth. When there is slow or nil demand growth with spare capacity, compounded by a sense that governments cannot govern a deepening financial crisis, entrepreneurs will not invest simply because interest rates may be low. Besides which, since the financial crisis, and with demands for recapitalisation, few banks are on-lending even the public funds which salvaged many of them from their purchase of toxic derivatives, and are charging high interest rates on commercial or personal loans to fund their recapitalisation.

3. Limits of the Proposals

The Green Paper admits that many of the implications of Stability Bonds go well beyond the technical domain and involve issues relating to national sovereignty. Also that some of the pre-conditions for the success of such bonds would depend on a high degree of political stability and predictability.

A fundamental limit of its three proposals is not only that they focus exclusively on stability but also that the German government, on the day they were pre-released, declared that it would not support them. Yet this is not surprising, especially for the first two proposals.

Proposal No. 1 is for full substitution of Stability Bond issuance for national issuance, with joint and several guarantees, i.e. the end of national borrowing.

Proposal No. 2 is for partial substitution of national bonds by Stability Bonds with joint and several guarantees. [5]  

The first proposal is imaginative but would not redress the current financial crisis since it would imply major Treaty revisions. The second proposal is that of the Bruegel Institute for a transfer of debt of up to 60% of GDP to a new European Debt Agency which also could imply a Treaty revision.

Yet the first proposal is unrealistic sinceGermanyand several other Member States are not willing to forego their own bonds, far less transfer all their borrowing to theUnion. Either proposal also would imply that surplus Member States underwrite the debt of others though joint guarantees which they not only are not prepared to do but also arguably have good reasons to oppose.

Proposal No. 3 is for partial substitution of national bonds with Stability Bonds and several but not joint guarantees. This approach differs from proposal No. 2 since Member States would retain liability for their respective share of Stability Bonds as well as for their national bonds.

However, as the Green Paper recognises, the key issue with this proposal would be the nature of the guarantees underpinning such a Stability Bond. In the absence of any credit enhancement, the credit quality of such a Stability Bond underpinned by several but not joint guarantees would at best be the weighted average of the creditworthiness of the euro-area Member States and could risk being compromised by that of the lowest-ratedMemberState.

It thereby recognises that a cascade of rating downgrades could be set in motion, e.g. a downgrading of a largerAAA-ratedMemberStatecould result in a downgrading of the Stability Bond, which could in turn feedback negatively to the credit ratings of the other participating Member States due to their contingent liability for all Stability Bond issuance.

The German Council of Economic Experts (GCEE) proposal presented in their Annual Report on 9 November [6] is not endorsed by the Green Paper but considered as an example of the partial issuance approach. This is for a debt redemption fund that would pool government debt exceeding 60% ofGDP of Eurozone Member States.

Like the Green Paper Proposal 1, and the Brueghel proposal, this is both bold and imaginative. Like the alternative proposals outlined below it would mean that all member states thereby becameMaastrichtcompliant on their national debt. Each participating country would, under a defined a consolidation path, also be obliged to autonomously redeem the transferred debt over a period of 20 to 25 years.

Analytically, the Council of Economic Experts’ proposal is the Brueghel proposal in reverse, pooling debt over and above 60% rather than that up to it. But it suffers from the same limits in that it would be based on the joint liability to which not only the Merkel administration but also most German electors are opposed.  It also would not necessarily redress the current crisis since it anticipates that the debt transfer would take up to five years to effect.

4. Twin Track Alternatives

The Green Paper not only displaces the vital importance of growth, and fails to refer to the Delors White Paper whose aims resonated for more than a decade at the highest political level.

It also is recommending proposals which imply not only mutual guarantees and therefore potential fiscal transfers, but also Treaty revisions and new institutions.

In so doing it neglects to cite other proposals for bonds both to stabilise the crisis and to fund growth which could be effected without the need for Treaty revisions. These include “Twin Track” alternatives with Union Bonds for Stability and Eurobonds for growth.[7] This approach:

► does not imply joint guarantees, fiscal transfers – or a general buying out of national debt – to which Germany and other key Member States are opposed;

► recognises that this could be by an enhanced cooperation procedure which would not bind all member states and with the key political advantage that Germany and other member states could keep their own bonds;

► distinguishes Union Bonds for stability which would not be traded from Eurobonds for growth which would be traded and attract inflows from the central banks of emerging economies and sovereign wealth funds.

– Without Joint Guarantees, Fiscal Transfers or Debt Buyouts  

The precedent that neither transfer of a share of national debt to the Union nor net issues of bonds need joint guarantees, fiscal transfers of debt buyouts is that of the European Investment Bank which has issued bonds without them for more than 50 years and has been so successful that it now is more than twice the size of the World Bank and the world’s largest multilateral development bank.

– By Enhanced Cooperation

The case for introducing Union Bonds for stability by enhanced cooperation by whichGermanyand other surplus member states could keep their own bonds has not been considered by the Commission Green Paper. But the precedent is strong in the introduction of the Euro itself which was a de facto case of enhanced cooperation.

The procedure for enhanced cooperation within the institutional framework of the EU requires nine member states. The voting procedure for enhanced cooperation depends only on the consent of the member states instigating it, not a qualified majority decision. [8]

– Union Bonds

On lines similar to the Bruegel proposal (Commission Green Paper Proposal 2) a conversion of national debt of up to 60% of GDP could be converted to Union Bonds for debt stabilisation by those member states consenting to them.

Unlike the Bruegel proposal, these need not be traded but could be held in a consolidated EU debit account. Such a debit account could not be used for credit creation any more than a credit can be drawn on a personal debit card.

Since the converted bonds would not be traded they would be protected against speculation by rating agencies. But they would not need fiscal transfers between member states. Member States whose debt is converted into Union Bonds would service their share of them.

The Bruegel Institute has proposed a new institution to hold the conversion of such a share of national debt to theUnion. But a new institution is not needed. The converted Union Bonds could be held by the European Financial Stability Faculty and, after it, by the ESM.

– Eurobonds

Eurobonds to finance recovery and growth would be traded and attract inflows to theUnionfrom the central banks of emerging economies and sovereign wealth funds. Brazil, Russia, India, China and South Africahave re-stated in September 2011 that they are interested in holding reserves in Euros in order to help stabilise the euro area.

Doing so by investing in Eurobonds rather than by national bonds both could strengthen the Eurozone and enable the BRICS to achieve their ambition of a more plural global reserve currency system.

– Not Counting on National Debt

Eurobonds would not count on national debt since they would be the bonds of theUnionrather than member states. An analogy is US Treasury Bonds which do not count on the debt of member states of the American Union such asCaliforniaorDelaware. They would not need member state guarantees anymore than do European Investment Bank bonds, while EIB bonds also do not cunt onMemberStatenational debt (see below).

– Union Bonds and the ECB or the EIF

Parallel proposals have suggested that the converted national debt should be held by the European Central Bank and net bond issues also managed by it.[9] 

Alternatively eurobonds could be issued by the European Investment Fund which was set up by Delors to issue Union Bonds and now is part of the European Investment Bank Group. The EIF would gain from the EIB’s vast experience and expertise in bond issues while the ECB could back them withut any further backing from the member-states or anyone else. The case that net issues of Eurobonds (for financing growth rather than existing debt-conversion) should be by the EIF as part of the EIB Group also makes operational sense in that the EIB has decades of experience of net bond issues whereas the ECB has none.

– Growth

Growth would be enhanced since Eurobonds would co-finance EIB investment projects which are serviced by the revenues of the Member States benefiting from them, rather than fiscal transfers between Member States.

None of the major Eurozone Member States, nor Ireland, Portugal or Greece, count EIB project funding against their national debt, nor need any member state do so. The decision whether or not to do so is governmental and does not depend on a Treaty revision.

– Cohesion

Cohesion would be enhanced in that, since the Amsterdam Special Action Programme, the EIB already has a cohesion and convergence remit for investment projects in health, education, urban renewal, the environment and green technology, as well as financial support for small and medium firms and new high tech start-ups.

– Competitiveness

Competitiveness would be enhanced by a share of the net inflows into Eurobonds financing a European Venture Capital Fund for small and medium firms, or a European Mittelstandspolitik, which was one of the original aims of the European Investment Fund.[10] 

– Maastricht Compliance

With a conversion of debt of up to 60% of GDP to Union Bonds all Member States other thanGreecewould beMaastrichtcompliant on their remaining national debt.Greecewould remain a special problem, since still well in excess of the 60%Maastrichtlimit but, as such, an exceptional case meriting continued debt buy outs.

– Stability and Growth Pact

The “Twin Track” strategy of Union Bonds for debt stabilisation and Eurobonds to finance growth also would give political and public credibility to the SGP where growth has been sacrificed to stability and would further be so by the proposals in the Commission Green Paper.  

Debt Restructuring and Reducing National Debt

None of the above is to the exclusion of debt restructuring in the sense of debt write downs. Nor does it deny the case for reducing national debt. But this could be phased over the medium to longer term in line with the “Twin Track” Strategy for combining stability through Union Bonds with growth through Eurobonds.

The case for reducing national debt through for growth has been demonstrated in the UScase by the adoption of such a strategy by the Clintonadministration and that in each of the four years of its second term the federal budget was in surplus.[11]

24 November 2011


[1] European Commission (2011). Feasibility of Introducing Stability Bonds. Green Paper. COM(2011)XXX, November 20th

[2] The case for the 15 million jobs target in the Delors White Paper, echoed by Tony Blair and Manuel Barroso in their February 2003 declaration, was based on econometric analysis of employment creation through of social investments in health, education, urban renewal and the environment – plus social negotiation of more labour intensive employment in the social sphere and the right to reduced working time to enhance work-life balance. Both of the latter were endorsed by the Essen European Council.   See further Stuart Holland, (1993). The European Imperative: Economic and Social Cohesion in the 1990s. Nottingham: Spokesman Books. Foreword Jacques Delors.

[3] Striedinger, A and Uhart, B. (Eds). (2006). The EU Lisbon Agenda – An Introduction. Brussels: ESIB, p. 10.

[4] European Trades Union Confederation, (2011). Mobilising for Social Europe. Athens, May 19th.

[5] Von Weizäcker, J. and Delpla, J. (2010). The Blue Bond Proposal.The Bruegel Institute. Policy Brief 2010:3.

[6] GCEE, 9 November, 2011

paragraphs 9-13 and 184-197

[7] Yanis Varoufakis and Stuart Holland (2011). A Modest Proposal for Overcoming the Euro Crisis. Levy Economics Institute of Bard College Policy Note  2011 / 3.

Giuliano Amato and Guy Verhofstadt (2011). A Plan to Save the Euro and Curb the Speculators. The Financial Times International Edition July 4th. The proposal also was supported by Enrique Baron, Michel Rocard, Jan Pronk, Jorge Sampaio, Mario Soares and Jacek Saryusz-Wolski, as well as this author.

See also Stuart Holland (2006). Financial Instruments and European Recovery – Current Realities and Implications for the New European Constitution. CEUNEUROP Discussion Paper no. 16. Faculdade de Economia, Universidade de Coimbra. July.

Stuart Holland (2003). After the European Constitution: Twin Action Proposals. CEUNEUROP Discussion Paper no. 38. Faculdade de Economia, Universidade de Coimbra.. July.

[8] A decision authorising enhanced cooperation shall be adopted provided that at least nine Member States participate in it. The Council shall act in accordance with the procedure laid down in Article 280 D of the Treaty on the Functioning of the European Union.  All members of the Council may participate in its deliberations, but only members of the Council representing the Member States participating in enhanced cooperation shall take part in the vote. The voting rules are set out in Article 280 E of the Treaty on the Functioning of the European Union.

[9] Varoufakis and Holland (2011), Op. Cit.

[10] Stuart Holland (1993). The European Imperative: Economic and Social Cohesion in the 1990s.  Op cit.

[11] Luce, E. (2011). Hope versus Experience. The Financial Times, November 12th – 13th.


    • I must admit that Stella’s use of Roman alphabet letters to write the Greek expression “καλὴ τύχη” had me fooled. 😉

      Today’s word of the day: “liquidity” … and lots of it!

  • In Euro zone, Angela Merkel decides for almost everything!
    Hope the Euro-MPs convince her about the Modest Proposal.
    Good Luck.

  • Interest rates are the only efficient and effective way to control poliicians. No treaties or commissioner can replace that.

  • Gool luck yannis but one can’t be very optimistic. These days neither the Commission nor the Euro MP’s are of much significance.

  • “Not Counting on National Debt: Eurobonds would not count on national debt since they would be the bonds of theUnionrather than member states. ”

    Great idea. I will go to the bank and thell them that in addition to my wife´s and my loan we want a couple loan and hence the total debt is not increased.

    Socialism never worked. No matter if it came from Delors or other Eurocrats. We need to get rid of the Euro, reduce the EU to a free trade zone and do more bunga bunga instead of control, redistribution and writing silly articles.

    • How much did Greece already privatize? Peiple are really getting angry in italy. We are paying more interest for our debt that Greece pays for the money we have lent to Greece in the first “rescue package”. The first rescue package had a condition of selling EUR 50b of assets. So far Greece has done how much on their side?

    • Youth unemployment:
      – 50% Spain
      – 45% Greece
      – 30% Portugal
      – 30% Italy

      This is a disgrace for the European Union. A whole generation is robbed of their future, just because the socialists and the political elite does not want to abandon their failed Euro project!

  • Good luck! Yesterday I heard a very interesting discussion in the German news channel “Phoenix” where Prof. Bofinger (one of the advisors of Ms.Merkel) and Prof. Horn very clearly defended a “kind of” Euro-bond solution, against a Prof.Hüther. Prof.Bofinger was astonishingly clear in saying that Ms.Merkel should be clearly asked, if she is really serious her claim, wanting to defend the Euro, when she does done “nothing” for two years (Bofinger’s words) and has rejected to give the patient the only medicine there is.

    Apart from the that. Yanis, this was one of the very rare good discussions we had in the German television. And I noted down two questions for you, which come from the reasoning of Prof.Hüther.

    1) He said, in my own words, “look at Ireland, the markets are rewarding, the fact that Ireland is rigorously applying the austerity measures.” He tried to make the case for a rational market, who is not just in panic, but rewarding and punishing good and bad policies. So what about Ireland?

    2) He said, (old FUD strategy) if we get Eurobonds, we can’t get rid of them ever. This is certainly a main strategy of Eurobonds opponents. Security focussed Germans will be very fearful in creating something, they will be locked-into for ever. Is this claim true?

    • Since you are asking, let me tell you about Ireland. It is and will stay forever out of the markets, until either Germany abandons its current denial or the euro breaks up – whichever comes first. Why? Because austerity is making its debt utterly unsustainable. The fact that its GDP grew a little is meaningless since this is not Irish income but the income of multinationals that is neither generated in Ireland nor taxed there. The real domestic economy continues to shrink. To describe this economy as an example of successful austerity is to be clutching at very small straws.

  • Good job, guys. It will be very interesting to see how this is received. Particularly by Germany.

  • Why do I have a bad feeling that financial armageddon is about to break loose after this coordinated move my central banks.There is a rumor that a big european bank is about to go down and that was the reason for the liquid infusions.

    • According to Nomi Prins, that rumour has no merit. The latest Fed move is about protecting the big US banks, especially Goldman Sachs, from derivative losses (“derivatives-chain trades, again with each other, and with European banks”).

  • I apologize for distracting from the discussion about Eurobonds but the 3 links below may be of interest to the readers/contributors of this blog. What they have in common is that they focus on ways how Greece, in the words of the EU Task Force, can become a country which is “characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos”. They also have in common that they focus on things which Greeks can do in Greece about and for Greece.

    The idea of all of this is to turn Greece into a country where a foreign investor who brings his capital to Greece for profitable investment in domestic growth does not experience what this Greek-American has experienced with his investment:

    • I read the first link .

      Honestly , this is just wishful reforming thinking .
      The more it pushes in this direction , the less success it ll have .

      I ll steal Mr Lygeros phrase about solutions : When you listen only about solutions and not about the problem , then this is probably just rhetoric .

      As long as they have not yet discovered the special social economics in Greece , the socio-financial structures that be .
      The only thing this policy does is ripping off the current structure and try to impose something which is more compatible with a capitalistic environment .

      This is not subtle change . It is brutal .

      Such inconsiderate plan will not succeed in Greece , if it starts its logic from such base .

      Let me share a link ,which i don’t agree with that either , but it starts from a more considerate base . It’s in Greek unfortunately :

    • Correction :
      line 12 ” is more compatible with a { capitalistic environment} ”

      is inaccurate .

      What i mean is not only the economic theory and free markets . I also include the social structure and history of such societies .
      Why do i do that?
      In Holland or England , capitalism has a history of centuries . More simple forms of capitalism created social-economic structures which then gave birth to more complex form of capitalism .

      Other countries had followed different routes in developing social-economic structures . Different needs , culture , tradition , critical mass .

      Try to analyse the economics of a country with criteria and philosophy of a different one will not work .

      Employ policies that presume a pre-existent social-structure will result in the destruction of all social-economic structure … which is not “very efficient” .

    • Ilias, I guess I can’t win. I had purposely only linked pieces of Greek authors to avoid to the impression that such ideas come from minds who are not familiar with the socio-economic structure of Greece. BTW, there are a lot of things in that structure which I admire such as: importance of family structures; role of the Orthodox Church; less hang-up with materialistic values; etc. etc.

      But I guess there are some socio-economic values which, I would venture to say, even go back to the Classic Greeks such as: the state of law in a republic; the solidarity in a society; and basically not taking advantage of one another.

      I am certainly not arguing for the form of capitalism which is being displayed in the financial industry these days. Nor a cut-throat, hire-and-fire economy. There is, however, one rule which I consider of universal value (unless, of course, you prove me to the contrary): “there is no such thing as a free lunch”. You can see that rule working on Wall Street the same way as in Mount Athos monasteries.

      Thanks for the link but you overestimate my Greek. Mr. Lygeros’ phrase about starting with problems and not with solutions I would subscribe to totally.

    • I agree with your universal law . Not as an ethical one but as a realistic one .

      Keep in mind that i usually comment to express my disagreement and trigger a dialogue (or at least i try to do so ) .

      I found a speech of the same writer , expressing some of his ideas described in his post . I don’t have a firm standing on this matter but it is interesting .

  • Καλή τύχη σε σας και σε όλους μας. Και αγνοήστε τις κραυγές των ηλιθίων, που είναι πολλοί, όπως ήταν πάντα και εντός και εκτός Ελλάδας

  • @Prof Varoufakis and Stuart Holland

    Good Luck!

    I apologise for not engaging with the full text of this latest proposal or the minute history it offers of the idea of common European bonds.

    Let me just say that Yannis Varoufakis’ highly-coloured, eclectic way of writing on this blog – and in “Modern Political Economy” – has put the energy back into my thinking about economics, and makes it clear that financial instruments are not merely financial instruments: because what is the _basis_ for such an instrument?

    The instruments of finance are not dead matter, to be reported on in deadpan terms, or (a la Varoufakis) in more artistic language, according to one’s choice or taste. The symbiosis between finance and faith is two-way: because an instrument of debt is an instrument of faith in the future. It’s this, as much as the technicalities and hideous contradictions of the Euro-crisis, that Varoufakis addresses: a fielded army of people, politicians, economists, market players, all frozen by each one’s awareness that they do not want to be the first one to move. Possibility is collapsed into the immediate future: no one will be the first to test this possibility, and be immediately cut down.

    Someone must act! From Australia I’m sure Prof. Varoufakis is familiar with the term “tall poppy syndrome”. There it means a supposed Australian tendency to cut down anyone who succeeds too far. Against a field of Australian contentment (don’t argue with this, I know it’s complex, but it’s a side-issue!) this term has a particular meaning. Here in Europe now it takes on another meaning, because we’re not living in the Australia which made everyday sense and gave rise to the expression: we’re living in a Europe and UK that has long since ceased making sense.

    There is a huge gap left in the public debate: the omission of the surely _slightly_ important term “how to secure a good future for everyone?”. Greeks, I think, know this great hole all too well and have known it for far too long – here in the UK the realisation is sinking in. The problems is a lack of tall poppies, or even of the imagining of their possibility. And watch out – the disease of despair is so widespread that positive suggestions will be met with… the original, Australian meaning: cut that poppy down!

    So I think the obstacles Prof Varoufakis and Stuart Holland will be meeting in Brussels are not just technical (misunderstanding of the Modest Proposal as “Eurobonds”; objection to non-existent fiscal transfers; ECB charter; German Constitutional Court, and so on and so on) but emotional: and the “emotional” is only a rude, dismissive, individualised synonym for its multiple equivalent the “political”. The problem is simply one of persuading someone to take the first step, making a fool of themselves by claiming that there is a future: that future-secured instruments can be secure.

    A problem of power, or lack of it. Is it too dangerous (as inviting misinterpretation of _my_ intentions, or of opening a long-closed door in European politics, given his associations) to mention Carl Schmitt? To consider whether what’s now happening might not constitute a “state of exception”, and that we have to persuade people that the established, legitimate basis on which things have been run for a long time is inadequate to the challenge? I’d like it if Schmitt’s inspired thinking about the limits of established structures of power in crisis situations could help – without that resulting in what resulted from his writing, in 1933.

    I truly think that a leap of _faith_ of that kind (but, I hope, NOT of THAT kind!) is what’s needed; and that YV and Stuart Holland can somehow cut through and spread the idea that faith is still possible.

  • Hello Yanis,

    I haven’t found a satisfying answer on your blog to a strong argument against your proposal: moral hazard. One of the main arguments of those who reject eurobonds or ECB as a lender of a last resort solution is that this way, peripheral states will not be forced to make reforms and can continue to live beyond their means. From this argument come all the profoundly antidemocratic suggestions of common economic governance, etc.

    What is your position on handling moral hazard which is necessarily part of every bail-out, be it a bail-out of a bank or a state?

    • Very simple: By having the ECB convert only the Maastricht compliant part of national debt, leaving the rest to member states to refinance, the Modest Proposal passes the moral hazard test with flying colours.

    • Good question, and an answer which even I can understand. Hmm, is it too simple to work, or the truth has to be simple? (Einstein)

    • Yanis et al,

      All Greeks abroad, worry seriously about our country, and I am no exception. Each according to his ability is trying to add his voice and his knowledge by getting involved in relevant blogs and forums that can make a difference.
      I am monitoring the ideas exchanged in yours, for a while now, to know how passionate both the host and all of his guests are and I admit with a few exceptions the dialogue and the arguments in reference to the modest proposal exchanged are worth considering.
      I am coming from a slightly different perspective being in the field of institutional analysis and applied organisational analysis for quite a few years now and I “run” a relevant blog on behalf of a small think-tank based in UK.
      To avoid misinterpretation of my reasoning, and before I (we) start to debate or throw unwanted ideas around, I would kindly ask the panel’s opinion on:
      1. What the infamous now, “systemic deficiencies” of the economy refer to,
      2. What is the framework that the institutional restructuring proposed ought to happen within
      3. What is their current understanding on the interrelationship between the economic and the social dimension are and finally
      4. How the modest proposal relates to the above three

      Looking forward to your replies and based on that I (we) may be able to offer a fresh perspective for your consideration.

      Kind regards
      Sotiris Melioumis Organisational Analyst

    • Thank you for your answer!

      It did not satisfy me (or I did not understand it). I will try to make it clearer. Let’s say a country’s debt/gdp ratio is 120%, and a moment comes that it cannot refinance its debt. After the Modest Proposal passes, its Maastricht compliant part of debt passes on to the ECB, so it has 60% of debt/gdp on its name, and the other 60%, he will owe it to the ECB. So this country can again finance its debt. This can be an incentive to continue getting indebted, and going up until 120% again, or until it hits the wall again. Then again this country can transfer its debt to the ECB.

      If a country never faces the negative consequences of its actions, what is the guarantee that it will change course?

    • @ Xenofon: the quotation from Einstein that seems most apposite for the eurozone crisis is (and I am addressing our intellectually challenged politicians, here):

      “We can’t solve problems by using the same kind of thinking we used when we created them”.

  • Dear Yanis,

    Since yesterday it is easier to convince German members of parliament of the Modest proposal. The Constitutional court in Karlsruhe decided till their ultimate decision that a secret committee of 9 members of the German parliament (mostly pro Merkel) must stop to decide about urgent questions of the euro crisis. Only the German parliament has the right to decide about budgets. The complaint against the committee was from SPD-members of parliament.

    Verhandlung über Bundestagsrechte
    Karlsruhe zweifelt an Sondergremium zur Euro-Rettung,1518,800619,00.html

  • ”Κλείνοντας, ασφαλώς υπάρχει τρόπος για να διασωθεί τελικά η Δύση από την υπερχρέωση: ο ελεγχόμενος πληθωρισμός (4-6%), σε συνδυασμό με πολύ χαμηλά επιτόκια δανεισμού. Δηλαδή, η αναδιανομή εισοδημάτων – την οποία φυσικά αντιπαθεί η διεθνής ελίτ και ειδικά οι τοκογλύφοι (τονίζουμε ξανά ότι, το πρόβλημα της υπερχρέωσης οφείλεται κυρίως στους τόκους – ειδικά στην Ελλάδα, όπου οι τόκοι αποτελούν το συντριπτικό μέρος του δημοσίου χρέους της, ενώ η δραστική μείωση του επιτοκίου δανεισμού στο 1,25% θα έκανε εφικτή την αποπληρωμή των 360 δις €, χωρίς καμία «εγκληματική» διαγραφή). ”

    Συμφωνώ με τον κ.Βιλιάρδο! Εσείς οι δύο έπρεπε να είχατε το Υπουργείο Οικονομικών…

  • for Yanis ( and his co-writers) had this epiphany, good and solid, realistic and straightforward thinking I am proud for having peddled (t)his message around, strange thing though I didn’t hear back from any of the German MoP I mailed, from whatever poltical flavour. This somehow proves the reason stated in the Global Minotaur not wanting them to loose the power and they have and hold now, as well as their stubbordness towards Eurobonds.

    what can the EP do against the EC; I hope more then the usaual bureaucratic flagging signals of disapprouval. good luck all the same!

    • wouter, you may have anticipated the future, because to lose the ‘power’ may be more important than fixing the problem – and not just in Germany. The neo-liberals have their fingerprints all over this “intractable problem” that can be solved relatively easily as this article describes. And once again we see from Eurointelligence blog this morrning that insistence on a crushing structural adjustment on working people in Europe is important to policy makers:

      “The IMF could become an important part of the package

      Reuters has the story this morning that a deal is currently being worked out, involving the IMF as part of a package. Under this “grand bargain” the eurozone would commit to credible deficit-reduction plans and an easier monetary policy, while countries with current account surpluses would pump more money into the IMF. Funding from the IMF, accompanied by ECB bond purchases, would give countries time to put political mechanisms in place for strong fiscal discipline. The article said it was a major development that eurozone governments confirmed that they are looking at providing bilateral loans to the IMF from national central banks. (The idea is that the IMF is more credible at cracking down on recipient member states than the eurozone itself. Such a deal, of course, also means that Mario Draghi and his colleagues will take instructions from Washington. This will be interesting. Doing this via the IMF might have some short-term technical attractions, but does this underline the message that the eurozone can sort itself out?)

    • Of course, if the eurozone could commit to wholesale deficit reduction, without a surplus recycling mechanism, there would be no need to involve the IMF, would there now?

  • The often cited comparison between ECB and EIB requires some clarification.

    Both have in common that they are, in the final analysis, owned by governments. Whether or not they are directly guaranteed by those governments is a bit of a moot point because their creditors will always lend on the basis of “implied support” from their owning governments. In other words, creditors assume that the governments can neither let the ECB nor the EIB go under.

    The huge difference between the two is that the EIB is a financier of projects and the ECB is not. As every banker knows, there are 2 general purposes of financing: “project financing” which is primarily based on the expected cash flows of the projects (and where the borrower’s own creditworthiness is of secondary importance) and “general working capital purposes” financing (where all depends on the borrower’s creditworthiness and one’s collateral). If a borrower goes bankrupt, the financier of his projects may not suffer at all if he can complete the projects which he is financing and get them to work profitably. The financier of his general working capital loses that part of his loan which is not secured by marketable collateral.

    Since the EIB has an excellent track record in project financing, it might be able to borrow at the same excellent rates which it has even if it were not owned by governments.

    The borrowing capacity of the ECB, directly guaranteed or not, will eventually boil down to the question of how the rest of the world sees the Eurozone and the EU as a risk zone. We are presently not only seeing runs on individual banks and individual countries, we are, in fact, seeing the beginning of a confidence crisis in the Eurozone and EU altogether. Should this trend accelerate, then countries can guarantee the ECB and/or Eurobonds for whatever they want — at some point, in the worst case scenario, there may have to be a bail-out of the Eurozone and/or of the EU.

  • That’s a great proposal without a doubt. But I would like to know how the deficits can be under 3% and how the overall debt under 60% on a sustainable and long term horizon, especially for Greece but other European nations as well. In any case congratulations for this great work/proposal.

  • All these stupid idea of control etc will not work:

    Bernard Connolly about the prerequisites of the EMU: “The whole economic culture would have had to become totally uniform across countries, to rule out the possibility of future divergence.” (The rotten heart of Europe, 1996)

    Bernard Connolly is an Oxford educated British economist from a working class background noted for his pessimistic analysis of the Euro. After writing The Rotten Heart of Europe: The Dirty War for Europe’s Money, a negative treatment of the European Exchange Rate Mechanism, he was terminated in 1995 from his employment at the European Commission.

  • Dear Yani,

    I have come to respect and like you insofar as I have known you through your work and your public appearances. But I can’t for the life of me fathom why you decided last night to go on the show of that lifestyle, pseudomacho fop Kostopoulos.

    Truly incomprehensible.

    • Simple. Because over the past year I have been on a mission to address all sorts of ‘captured’ audiences – ranging from housewives whose only exposure to reality is Yiorgos Aftias to younger audiences who do not bother with current affairs but may watch Kostopoulos. Friends tell me it is not good for my image. I reply that I do not care in the slightest. If I wanted to become Governor of the Bank of Greece, or to be admitted into ‘polite society’ with a view to some respectable position (Head of Ethniki Bank or some ministry), it would matter. But since I have no such interest, I shall speak to anyone who grants me access to a large audience without interrupting too much. That is my condition. And Kostopoulos respected that.

    • Yanis saw you once last year on mega savvatokiriako and aganostakis barely let you speak,either he wasent understanding what you were saying or just didn’t want to understand.i wish you can speak on a primet time one like anatropi with prentenris or hatzinikolou to get out to the a bigger audience.

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