Ringfencing Europe

A Modest Proposal for a Decent European Future[1]

Summary of presentation to be made on 13th April 2012,  at INET’s Berlin Conference

Session: The Future of Europe


Europe is currently caught up in a false dilemma between current policies, which are contributing toward the eurozone’s disintegration, and a ‘federal move’ that cannot possibly unfold swiftly enough to arrest the Euro Crisis. This paper presents a third option for resolving the Euro Crisis and, at once, creating the circumstances that may yield a decent future for Europe. It is predicated upon three bold steps that can be taken in the very short run in order to combat the Crisis’ three components: (a) the crisis of the banking sector, (b) the sovereign debt crisis and (c) the crisis of underinvestment that is connected to the eurozone’s internal balance of payments problem. The main idea is to manage these three issues more rationally by utilising existing European institutions and by means that require no cumbersome Treaty changes, no constitutional amendments and, indeed, no loan guarantees from the eurozone’s surplus countries. Such a program would help ringfence Europe from the process of disintegration, avert a new Great Recession, and give Europeans appealing options for a shared future of which only one actually involves federation.

1. Introduction: The false dilemma

United only in name, Europe is in a process of slow burning disintegration. The Euro Crisis is operating with the vicious determination of a termite colony eating into the foundations until nothing but an empty shell will be left of what, until recently, was hailed as the lofty ideal of a United Europe.

On the one hand, the established policies are pushing the eurozone, and by association the European Union, toward a precipice. Piling great new loans on the weakest of sovereigns, on condition of deep, generalised, austerity (that is bound to diminish the means from which these debts must be repaid), buys time at the expense of hope. Meanwhile, the exercise of massive liquidity provision for quasi-insolvent banks only succeeds in turning an acute crisis into a chronic disease that numbs our continent’s senses, increases the likelihood of another financial collapse, and reduces Europe’s capacity to withstand the latter once it hits.

On the other hand, the sole alternative to disintegration that is currently canvassed energetically is the ‘federal move’. Alas, it only needs to be stated to incite desperation even amongst those who would like to see a Federal Europe (while its foes celebrate). The reason is simple: The road to Federation is long and bumpy while the Crisis is unfolding rapidly, unimpeded; certain to outpace even our swiftest of ‘federal moves’. When this happens, and the eurozone disintegrates before proper federation is achieved (as it is certain to do), there will be nothing left to federate but smithereens. Put differently, a United States of Europe requires a gestation period, if it is to be worth its salt, which is many orders of magnitude longer than the period in which we must arrest the Euro Crisis.

Many commentators are in agreement with the above depiction of Europe’s conundrum. Their gloomy conclusion, thus, is that Europe-as-we-know-it is finished. Or, more precisely, that, before Europe’s integration recommences again, sometime in the future, the unification process which began in the 1950s and culminated in the current arrangements will be torn asunder under the irrepressible centrifugal forces unleashed by the Euro Crisis. If they are right, it is not just Europe’s integration that is at stake. Given the non-linearities of the enterprise, and the recessionary posture of the global economy, a deconstruction of the eurozone will more likely than not usher in a postmodern 1930s. Not for the first time in history, Europe’s political failures will have dragged the rest of the world into an avoidable mire.

The pressing question, therefore, becomes: Is there a third alternative? Or are we stuck between the rock of the current (toxic) policies and that hard place of going ‘federal’ when unready to do so? Luckily, this dilemma is a false one. In what follows I shall outline a third option which I shall call: Decentralised Europeanisation.

2. The diagnosis

The Euro Crisis is unfolding on three interrelated terrains.

Banking crisis: While sparked off by events across the Atlantic, and the English Channel, the problem with the eurozone’s banking crisis was never properly addressed. The reason was the terribly odd arrangement whereby governments maintain national control over global banks inhabiting within a trans-national currency union. At a time when forced recapitalisation of essentially insolvent banks was of the utmost importance, national political elites are unwilling and unable to do that which is in the interests nor only of Europe’s economies but even in the interests of the banks themselves (which ought not be confused, of course, with the interests of the banks’ major shareholders).

Sovereign debt crisis: Again as a result of a design fault, the sudden and catastrophic loss of liquidity that came to be known as the Credit Crunch of 2008, inevitably turned the eurozone’s most cherished principle (of perfectly separable public debts) into the ‘popcorn effect’ that drove three sovereigns into effective insolvency, before putting at least two large member-states in bankruptcy’s pre-chamber. Suddenly, reality bit back, reminding us that even though a common currency shields us from runs on individual currencies, our perfectly separable debts were bound to lead to a sequential run on member-state bonds, once panic set in the money markets following the financial sector’s implosion.

Under-investment and imbalances crisis: Members of this audience need not be lectured on the centrality of the dearth of investment afflicting Europe, in the aggregate, but also of the detrimental effect on the eurozone’s past and future of the absence of a recycling mechanism by which surpluses are diverted, in the form of productive investments, into the deficit producing regions. Without such a surplus recycling mechanism, the balance of payments problem that is internal to the common currency area can only grow inexorably during times both good and ill. The only difference is that, as one might expect, these imbalances make themselves badly felt when the burden of adjustment falls, in times of Crisis, on the deficit member-states.

Clearly, the task in hand is to address all three of these facets of the Crisis at once. And to do so in ways that can be pursued by existing European institutions, so as not to put the cart before the horses, i.e. seek federal solutions as a prerequisite for saving the process of integration that ought to lead to… further integration.

3. Our task as a constrained optimisation problem

Designing the solution-concept for the current Euro Crisis resembles a constrained optimisation problem. First, we must state the objective. This is the easy part: To arrest the Crisis simultaneously in the three terrains (mentioned above) where it is currently progressing unimpeded. Secondly, we need a realistic catalogue of the constraints under which we must labour. Third comes the difficult part: working out if a policy mix achieves our objective without violating any of the constraints. To get the ball rolling, let me propose a rudimentary list of three constraints which, I think, ought to be accepted at the very outset:

(a)  The ECB will not be allowed to print in order to monetise sovereigns directly (i.e. no ECB guarantees of debt issues by member-states, no ECB purchases of government bonds in the primary market, no ECB leveraging of the EFSF-ESM in order to buy sovereign debt either from the primary or the secondary markets)

(b)  Surplus countries will not consent to the issue of jointly and severally guaranteed eurobonds and deficit countries will not consent to the loss of sovereignty that will be demanded on them without a properly functioning Federal Europe

(c)  Federation (e.g. the creation of a proper European Treasury, with the powers to tax, spend and borrow) will not precede the Crisis’ resolution.

The question is: Does a policy mix exist such that it achieves our objective without violating any of the three constraints above? I believe that the answer is affirmative.

4. A Modest Proposal

To respect constraint (c), we must ensure that our solution-concept introduces no new EU institutions and violates the letter of no existing Treaty; for that would involve new Treaties whose conception, approval and activation will take so long that it will be hardly worth having. In short, we need to utilise existing institutions, perhaps tweaking their workings in ways that remain within the letter of European Law but allow for new functions and policies. Which are the available institutions presently? They are the ECB, the EFSF-ESM, the EIB (European Investment Bank) and the EBA (European Banking Authority). Here are how these, existing, institutions can be deployed in a manner that respects the three constraints and achieves our objective in each of the Crisis’ three terrains:

Banking crisis: The eurozone must be a single banking area with a single authority that supervises directly and recapitalises, when necessary, the area’s banks. To this purpose, the existing national boundaries are to be dismantled, together with national supervisory authorities, and the currently confederate EBA is re-jigged to become a unitary agency with a board comprising existing EBA and national bank supervisor officials, plus representatives from the ECB and the EFSF-ESM. The newly unified and sovereign (over the eurozone’s banking sector) EBA conducts stress tests (rather than supervising, as it does now, their conduct by national bodies) and, on the basis of their results, recapitalises the eurozone’s banks directly. A large portion of the EFSF-ESM funds are to be used for the purposes of such direct recapitalisations (direct in the sense that the funds flow directly from the EBA to the banks without mediation from the national governments and without these capital injections counting as part of national debt). Naturally, the EBA takes equity in the recapitalised banks which it then sells off, at a time of its choosing, back to the international marketplace. In short, the banking supervision is Europeanised (acquiring important characteristics of a European TARP).

Participating institutions: EBA, ECB and EFSF-ESM

Sovereign debt crisis: The ECB, faithful to constraint (a) above, does not seek to buy or guarantee sovereign debt through monetisation (direct or indirect). Instead it acts as a go-between, mediating between international and European investors, on the one hand, and member-states on the other. In effect, the ECB orchestrates a conversion servicing loan for the part of the debts of member-states which does not exceed the EU’s Maastricht limits (60% of GDP) and for the purposes of servicing their bonds upon maturity. The conversion servicing loan works as follows: For member-states that wish to participate in this scheme (a scheme that can be enacted through Qualified Majority Voting), and upon maturity of a sovereign bond of the said member-state, the ECB services a portion of it that corresponds to the percentage of the member-state’s debt which is Maastricht-compliant (e.g. for a member state whose debt to GDP ratio is 80% of GDP, the ECB will service two thirds of a maturing bond). The ECB does this by issuing in its own name ECB-bonds and uses these funds in order to cover the (partial) servicing costs of the eligible part of maturing national bonds. Simultaneously, the ECB opens debit accounts for the member-states on the basis of a legal commitment by the latter to service to the full these ECB-bonds upon maturity. To safeguard the credibility of this conversion, member-states agree to afford their ECB debit accounts super-seniority. Additionally, in line with one of George Soros’ recent recommendations, the conversion servicing loan mechanism can be insured by the ESM-EFSF. E.g. if a member-state goes into a disorderly default before an ECB bonds issued on its behalf matures, that ECB-bond payment is covered by insurance purchased or provided by the EFSF-ESM.)

Participating institutions: ECB and EFSF-ESM

Under-investment and imbalances crisis: To deal with the overall underinvestment crisis, the European Investment Bank (EIB) funds large scale investment programs while the European Investment Fund (EIF) funds small and medium sized firms and start-ups, offering venture capital for the purposes of kick-starting growth in high technology, green energy, environmental health, education and urban renewal projects. Why is the EIB-EIF not doing this now? It does. But at a severely circumscribed level because of the convention that 50% of project funding is financed by member-states. As member-states are fiscally stressed, the EIB’s growth potential is minimised. Our proposal is that this 50% co-financing, which now acts as a mighty break on growth (courtesy of the indebtedness of member-states), comes from additional, net, ECB-bond issues. Aggregate investment in the eurozone thus funded (50% by EIB-bonds and 50% by ECB-bonds) could be calibrated to a level equal to some proportion of total eurozone GDP while the distribution of funding within the various eurozone regions (and not just countries) should be designed to counteract the internal imbalances of competitiveness and intra-eurozone (im)balance of payments. In effect, the EIB-EIF investments will operate in a manner not too dissimilar to Keynes’ original idea of a Clearing Union; only in this case it would be an explicit, investment-directed surplus recycling mechanism.

Participating institutions: EIB-EIF, ECB

5. The Proposal’s merits

I begin by noting that our Modest Proposal respects the three constraints simultaneously: It does not ask of the ECB to print money on behalf of member-states but, instead, to borrow on their behalf in the context of providing them a form of conversion servicing loan. As the ECB’s charter bans the creation of a credit line for the sovereigns, but not the creation of debit accounts into which the member-states pay monies that the ECB will use to repay its bonds, the scheme suggested here requires no Treaty or Charter changes and no money-printing. In combination with the EFSF-ESM insurance scheme, plus the super-seniority of the member-states’ ECB debit accounts, our proposal is well within the letter of the ECB’s own charter. As for the Treaties (Maastricht and Lisbon), and the requirement of no fiscal transfers, I note that the ECB-bonds are not guaranteed by the taxpayers of some countries on behalf of some other member-state. Just like California is not backstopping US Treasury bills, similarly here, German taxpayers do not guarantee/provide any loans to Greece, Ireland etc. Moreover, the beauty of ECB-bonds is that they can be issued tomorrow, unlike joint and severally guaranteed ones that would not only come with higher interest rates but would require a hellishly complicated, almost federal, institutional setup to be cast in stone in advance.

Note also that, in addition to shrinking the aggregate mountain of eurozone sovereign debt, as a result of allowing the ECB to issue its own bonds so as centrally to manage the Maastricht compliant eurozone debt, these bond issues by the ECB allow for synergies between the strategies for shrinking debt and those dealing with underinvestment and the chronic eurozone problem of internal imbalances caused by underwhelming and lopsided investment. Add to the mix the beneficial effects of a recapitalised and unified euro-area banking sector and what we end up with is all the essential elements of a complete eurozone makeover; one that puts it in good stead not only to arrest the current Crisis but also to avert future ones.

6. Conclusion

The three policy steps proposed here could be described as a process of Decentralised Europeanisation, to be juxtaposed against the kind of hasty, Authoritarian Federation that is currently seen, falsely in my eyes, as the only alternative to the Authoritarian Disintegration that is the order of the day. In essence, what we are proposing is that three areas of economic activity are Europeanised: banking supervision, sovereign debt management and planned investment flows. However, the proposed Europeanisation retains a large degree of decentralisation, one that is consistent with maximum sovereignty for member-states combined with the minimal rationality required for the effective governance of the common currency area.

In an important sense, our proposal for Decentralised Europeanisation is, indeed, quiet modest. While broad in scope and ambition, it suggests no new institutions and aims at redesigning the eurozone with minimal use of new rules, fiscal compacts, pan-European czars, etc. Moreover, it does not require a prior agreement to move in the federal direction. It can, therefore, unite those who want to end the Crisis independently of whether their vision for the future includes a Federal Europe as a dream, as an irrelevance or as a nightmare. For this reason, it stands the best chance of being adopted (once the current fixation with non-solutions abates).

There is another reason too for favouring our proposal: Federation is too important to be subsumed into a short-term struggle to ‘save’ wayward member-states, to contain spreads, and to deal with troubled bankers. A United States of Europe, if we ever choose to bring it about, deserves more than institutions devised on the run and under pressure from Moody’s and Fitch. It will only be worth having:

  • when Europeans can begin to countenance an electoral system which asks of Germans and Greeks alike to vote among Greek and German candidates
  • when it is possible to discuss the dissolution of national armies and their merging into a single European Defence Force
  • when your views and mine are assessed on their pure merits, rather than on who you are, what accent you present them in, whether you are Dutch or Portuguese – when, in other words, the lost virtue of Ancient Athenian isigoria is revived Europe-wide
  • Symbolically, we shall know that we are ready for a decisive Federal Move when we can agree on what actual image to print on our euro notes, in place of abstract bridges and gates that exist nowhere in Europe, symbolising the lack of common symbols

Till then I believe that the minimalist, modest, yet far reaching, proposal herein deserves careful consideration.

[1] This paper draws upon a Policy Paper, jointly authored with Stuart Holland, entitled A Modest Proposal for Resolving the Euro Crisis. See also my recent post entitled Assessing George Soros’ latest plan for saving the eurozone  


  • You bring me enlighten solution even in the darkest economic moments;Thank you for this!

  • Dear John, i am afraid that is to late for the european dream. People around europe are perceiving the whole thing as something that destroys lives in the periphery for the benefit of a northern elite. Thiw period, the poverty, the harsh words, will be remembered for the generations to come , is another war economic maby, but nevertheless the schism it creates will eventually became as big as the grand canyon.
    Unfortunately sooner or later EU will be disintegrated…

    • Let´s hope the nightmare of “ever closer centralization” in corrupt Brussels is over soon!

  • Yanis, when you say:

    “However, the proposed Europeanisation retains a large degree of decentralisation, one that is consistent with maximum sovereignty for member-states combined with the minimal rationality required for the effective governance of the common currency area.”

    I worry that one of the unspoken themes of German/neoliberal austerity being imposed now on Greece, and eventually everyone, involves more than just a war on labor, but has intent to ‘minimize’ sovereignty for member-states, and do away with as much democracy as possible throughout the whole EU. The more I think about the neoliberal coups that took place in Greece and Italy the more I’m inclined to believe that democracy itself is under extreme assault in Europe, and the efforts to put banks in charge of the world are proceeding apace .

    • And you are, of course, correct to fear this. Nevertheless, this tendency can only be exposed when a rational plan is offered which the powers that be reject without offering an convincing explanation; leaving your interpretation as the obvious one.

  • I think Yanis focuses on the “big picture” highlitening the appropriate steps to backstop the crisis. I agree with him as he is the only in Greece who gave accurate estimations of the “CRISIS EVOLUTION”. But on the other hand we all should agree that with those corrupt levels in Greece as well as the greek citizens believing that all the world owes to us and not insisting on the structural changes , I dont think we can be optimsitic. Yanis gives the solution in short terms but i think that the biggest problem is the new long term equilibrium in our economy.

  • Francisco-Javier Braña (Professor of Applied Economics, University of Salamanca, Spain) says:

    Dear Professor:
    Just one question? Why do you, following a new fashion, speak of “sovereign debt” instead of public debt, as it has been called for years, even centuries? Actually, you can’t find any single text book on public finance or on economics of the public sector which names public debt as sovereign. Could you give me any explanation? Is this just a change of terminology or there is anything I ignore behind?
    Because I would like you to pay attention that the opposite of sovereign is subject, while the opposite of public is private, so I suspect behind the change is an intention to hide that the main problems in our countries has been the private debt (and still is in countries like Spain), not the public one.
    Anyway, congratulations and many thanks for you writings, I’m learning a lot.

    • I might be wrong but sovereign debt is public debt owed in foreign currency.In this sense greek public debt is 100% sovereign

    • I vote for calling it “governmental IOU’s”!
      No, seriously, folks, as long as we all know what everybody is talking about, is it important how we call it? Crossover does have a point though – when discussing the details, the difference between debt in the domestic currency and debt in foreign currencies is important, of course. The Icelanders, for instance, had to learn that the hard way.

    • Reply to Gray Goods;
      As someone who intends to practice science, (yes, I know, is quite difficult being an economist), giving proper names to things is quite important, otherwise we can be confused by ideology, as it seems to be in this case. For instance, the Spanish public debt in other currencies, other than euro, that is “sovereing debt”, is negigible (less than 1 per cent of total), though external debt accounted for 50,4% of the total public debt by December 2011.

    • @Prof. Francisco-Javier Brana
      How do you define a domestic currency in contrast to a foreign currency?
      Imho the problem with the euro is that while it would look to someone as if its a domestic currency for all the eurozone countries,in reality it functions as foreign currency and so does all euro-denominated debt (foreign-sovereign debt).
      You cant control the interest rates,you dont have issuance ability it would make no difference if a country used the euro or the dollar or any other currency it doesnt control.By “difference” i mean when it comes to monetary policy.

      From that prespective Spain just like Greece has 100% foreign denominated debt.

      Btw i googled “sovereign debt” i came up with these findings:
      Sovereign debt usually refers to government debt that has been issued in a foreign currency http://en.wikipedia.org/wiki/Government_debt

      Definition of ‘Sovereign Debt’
      Bonds issued by a national government in a foreign currency, in order to finance the issuing country’s growth.


  • Imagine a child with a toy. The particular toy is very special for that child and it will not allow any other child to play with it. Yet every time you pass that toy you cannot resist reaching out and quickly touching it, to the annoyance of the possessive child.

    This is you with your proposals. The toy is the ECB. The child is Germany. Your proposals cannot resist ‘touching’ the ECB in one way or another.

    Are you practicing your singing voice so that we can fill up the Albert Hall in London?

  • Yanis how important is outcome of the French election have on the euro zone.

    • Maybe in Berlin they will show the “sucessful” results of the Eas German “Marshall plan”.

      – After > 10 years of sending EUR 100 billion p.a. from West to East there is little to show for (other than nice infrastructure)
      – Out of 500 leading companies in germany, 7 (seven) are headqurtered in East Germany
      – Average income East is only 75% of average income West
      – Eastern State budgets can cover their only to 30% (the rest is transfers from the West)

      What a waste of money in terms of efficient allocation! BUT a great example of how the Marshall plan results for Greece would look like!

    • Answer to Pedro: There was never a Marshall Plan for East Germany. There was (and there is) money transfer to compensate for an almost complete distruction of the economy. It is worth looking at the unequal development inside Germany – an interesting case for a much broader phenomenon of similar spatial disparities. Just like the UK before, Germany has created its own “internal periphery”. Planners like myself are now asked to develop Regional Development Plans (we are working on one at the moment in one of the poorest regions in the country), which are just local patches for politically motivated developments.

    • Pedro is having difficulties in understanding that for several reasons all regions inside every country cant and wont ever be equally wealthy.No wonder he wouldnt ever understand that this is true for a group of countries also.Its like a New Yorker wondering why cant Wysconsin be New York.
      And while i dont even know whether the transfer of payments from W. Germany to E. Germany are anywhere near similar to a marshall plan (i have no insight in the details) what i do know is that the actual Marshall Plan did work for Greece..anyone ever heard about the Greek economic mirracle?

    • In contrast of all the “money redistributers” I believe that convergence as planned by politicians never works.

      It is good that different parts of one country have different wealth levels, and the same is true for different countries.

      Efficient capital allocation is what we need not arbitrary spreading around of capital.

    • “Pedro is having difficulties in understanding that for several reasons all regions inside every country cant and wont ever be equally wealthy.”

      Uh huh? You’re quite knowledgeable about economics, Crossover, so you certainly can show us which merited scientist came up with this theory? I’m not so knowledgeable, but afaik Paul Krugman won the Sveriges Riksbank Prize in Economic Sciences (aka Nobel Price) for his work on a theory that basically leads to the opposite conclusion. So, I’m eager to read about the source you base your opinion on!

    • Gray,

      Im not really sure that Krugman proved that Athens has the same gdp per capita with a village in north Greece.Athens “exports” to this village industrial goods,tourism,several services etc while the village only produces dairy products,fruits etc…that village always had and will always have a trade deficit with athens, and if there werent forms of transfer payments (taxing a part of athens’ wealth and distribute it to the village etc) there would come a point that the village wouldnt be able to even exist.

      Obviously this isnt what Krugman tried to prove…what he tried to prove instead and i quote the nobel authorities themselves,was “Krugman’s theories have shown that the outcome of these processes can well be that regions become divided into a high-technology urbanized core and a less developed “periphery”.

      You argued over whether is it true or not that “for several reasons all regions inside every country cant and wont ever be equally wealthy” while having Krugman concluding that “regions become divided into a high-technology urbanized core and a less developed “periphery” only proves that these regions cant be equal….

      So while i dont have any actual source to back my belief, i thought common sense would be enough….
      After all even in the same city you have “trade imbalances” between individuals and thats exactly the reason why any government ought to tax the rich and distribute it to the poorer ones.

    • Firstly the US is one country, the EU is thankfully, because the diversity is (was) its strength is not.

      Secondly, there are no bailouts of US states, US counties etc. You will see several such events in the US history and the well managed States, counties etc. did not pay off the debt of not so well managed.

      On the other hand the Soviet Union used to have redistribution mechanisms in place that organized flow of money first to Moscow and then to places were politics thought the money would be used in their intentions.

    • @Pedro
      It is irrelevant whether EU is one country or not.Does it change the fact that there are differences between regions which are not balanced?
      You can even argue that the whole world is not a country and still there are imbalances that can cause problems if they are not handled.

      Furthermore USA is a country with its own currency.Is Greece a country with its own currency?is Germany a country with its own currency?EU is bastardized.Its monetary policy is imposed at the EU level (as if EU is a country itself) and its fiscal policy is imposed at country-wide level and thus varies from country to country (as if EU is not a country).
      How many countries do you know that have separate fiscal from monetary policy?

      Soviet Union is different because it had 100% planned economy,but distribution mechanisms at a country level exist in capitalist countries too.The tax system itself is a distribution mechanism.

    • http://www.frbsf.org/publications/economics/letter/2011/el2011-18.html

      Further indications of how flawed it is to separate fiscal from monetary policy.

      “The euro area’s problem of a “one-size-fits-all” monetary policy is not unique. In the United States, economic conditions have frequently differed dramatically across regions. The Federal Reserve does not set different monetary policies for different parts of the country. Nevertheless, the tensions over monetary policy in a union of many separate countries are likely to be greater than tensions in a single country. The United States can rely on its relatively high labor mobility and on fiscal policy to counter economic weakness, for example, options that may not be fully available to the euro area’s heavily indebted peripheral countries.”

    • >>> You can even argue that the whole world is not a country and still
      >>>there are imbalances that can cause problems if they are not

      Fully agree. There are problems, OK. I accept that. The only difference is that I beleive that everyone should sort out his problems. Otherwise you will have “convergence” to the lowest standard.

      >>>How many countries do you know that have separate fiscal from
      >>>monetary policy?
      Only one. We call this the acid test. If noone is doing it is very likely that an idea is idiotic. –> Dissolve this nonsense. the sooner the cheaper.

      >>>The tax system itself is a distribution mechanism.
      Correct, but how many countries do you know distribiute their revenues by a magnitude of 10% and more of GDP to other countries. Acid test —> idiotic idea.

    • @No EU Dictatorship

      “Fully agree. There are problems, OK. I accept that. The only difference is that I beleive that everyone should sort out his problems. Otherwise you will have “convergence” to the lowest standard.”
      But thats exactly what troika is advocating.Convergence to the lowest standard.For example the new memorandum says that wages should be adjusted in order to be in line with “competitor countries” without defining them.So the troika says that Greece should become “Bulgaria” instead of boosting Bulgaria to becoming “Greece”.If this isnt convergence to the lowest standard then what is it ?And whats the purpose of this?So that the elite could increase profits.Its not helping the avg. eu citizen a bit.

      Similarly its like saying that US citizens should decrease their living standards towards those of Chinese citizens instead of demanding the opposite!
      I was reading a blog the other day where a similar discussion was taking place.Someone said “What is happening now is completely normal.You cant have an african university graduate having lower wages than the unskilled european worker”.And obviously someone else suggested that the Africans should be able to increase their standards.not the opposite.

      This situation is like a joke that goes by: One day God came down to earth.He went to a house.Saw the owner and told him “Hi.Im God.Do you have any request that i should fulfill?” The guy replied “I want a goat,so that i can fill my hunger by drinking its milk”.So God gave him a goat.He then went to the neighboring house.He asked the man if he has any request.The man replied: My neighbor has a goat.I dont.I want my neighbor’s goat to die.lol

      “Only one. We call this the acid test. If noone is doing it is very likely that an idea is idiotic. –> Dissolve this nonsense. the sooner the cheaper.” One? Its more like 17 of them…
      Lets analyze it.What does dissolve mean?It means that we merge monetary and fiscal policy together again.So this is achieved by either dissolving it or by transfering fiscal policy to the same entity that handles the monetary policy (i dont mean handing monetary policy to ECB….but to EU).I understand you are against the latter.I’d prefer the euro never existed also,but they never asked me.Right now i can only try to figure out which of the 2 choices has more gains than losses.If someone can figure out a plan on how to disolve the euro ESPECIALLY DURING GLOBAL ECONOMIC RECESSION,without wrecking havoc,im all in.

      “Correct, but how many countries do you know distribiute their revenues by a magnitude of 10% and more of GDP to other countries. Acid test —> idiotic idea.”
      Agreed.So if they’re not prepared to follow the laws of “economic nature” they should never follow the path of common currency etc.Nevertheless the problem is still here and disolution is more easier to say than to do.

    • 1. A mistake doesn´t get better if you repeat it or don´t correct it. Phillip Bagus came up with a proposal how to dissolve the Euro. We to destroy the Euro before the Euro destroys Europe. It will be painful, but in 3 years everyone will be better off.

      2. “What is happening now is completely normal.You cant have an african university graduate having lower wages than the unskilled european worker”. – Actually you can. I know plants in Czech Republic 30km from the German border where people on the shop floor make less than 50% than on the other side of the border in similar plants. Many people are not economic optimizers, they value “home”, culture etc.

    • Oops, I misplaced my lengthy answer to Crossover! Pls scroll up to find that comment.

      Ok,, now to “No EU”. Certainly not surprisingly, especially if you’ve read my vision for the EU, I’m very much against ending the Euro project. It doesn’t make sense now, since, after all, it’s “only” about 60 millions of the 340 million strong Eurozone population that is living in struggling nations (and only 11 millions that really may profit if their nationn left the currency). Why destroy a system that is working reasonably well for the vast majority of people when it’s a minority that is having problems? We should rather work hard on creating a solution for that instead of blowing everything up in a mad mood born out of frustration!

      And, as I pointed out, this would be the desastrously wrong decisions inn the long run, too. Because a stronger political unity can’t reasonably work without more fiscal unity, and this requires a common currency. Or does everyone here seriously believes the US would have become a superpower without creating the dollarzone and mainting it through the centuries? That federation faced a lot of problems after its birth, the controversies about taxation and federal power were intense, and without the dollar the whole creation would have been crushed under the economical difficulties. The dollar was essential for establishing unity, and it’s the same in Europe, too. Without the Euro, there’s no chance for a stronger EU. And without a strong EU, the European nations will be powerless against the big financial and political powers that are trying to shaoe the world according to their interests today. No European should want to see that happen. United we stand, divided we fall!

    • “Im not really sure that Krugman proved that Athens has the same gdp per capita with a village in north Greece”
      Crossover, you’re shifting the goalposts, this specific question wasn’t the point. We were talking about if your statement that “all regions inside every country cant and wont ever be equally wealthy” is true. Krugman’s work showed it isn’t. Different regions can create the same wealth and income, depending on several factors that he identified. And Pedro is right, of course efficiency plays an important role in that. So, your determined statement that this can never happen goes too far. And imho the defeatist view, that an underdeveloped region can’t rise up to the standard, isn’t helpful at all. Greece needs more motivation to improve itself and less of the whiny conviction that “it’s all useless anyway, we’re just pawns of outside powers”. If people believe that, it becomes a self fulfilling prophecy.

      Next: No, I’m actually not against more fiscal integration. I’m just against implementing this in a way that rather cements the differences instead of creating a meanchanism to lift all boats to the same level! Simple subsidiziation of underperforming regions hasn’t worked, not in the US, not in Germany, not in Italy, not anywhere, afaics. We would be stupid to go for this failed model. Instead, the EU should do more to even the chances, with policies that create a similar standard of infrastructure and education in member states, plus a program to help startups and small businesses in regions that are lagging behind. Those funds shouldn’t go to the national governments at all, which will much too often divert them for their own political interests, but rather directly to the projects and businesses. And at the same time, there have to be clear, enforceable guidelines to stop nations from engaging in a race to the bottom to onesidedly improve their situation at the expense of others (like, subsidies for investments). This is important to stop the “divide et impera” strategy of international big money interests. All in all, like always, I’m for regulated markets where competition provides an incentive to improve, but without capitalism eroding social standards. And I’m well aware such a system can’t be created overnight, probably not even in a decade, but the sooner we move in that direction, the sooner we’ll see positive results.

      Obviously, this system of fiscal integration, like all others, heavily depends on the national governments doing their part. And if the political leadership of one nation decides to violate the guidelines, this has to lead to dire consequences. It can’t be alll carrots, there have to be sticks, too, or else offenders profitting from undermining the standards would create a centrifugal force that would blow the whole engine apart. This has to be met with strong political and financial leverage that forces outliers back to the center again, towards following the laws that are democratically passed by the EU parliament. And if all else fails, a rebel nation has to be excluded from the Union. Just look at what’s happening in Hungary now! No federation of nations can tolerate such a violation of basic rights in a member country. The dangerous development there may soon become the most difficult test case for the inner strength of the EU, dwarving the problems from the bond crisis. Only if our governemts and the parllimanent in Brussels find a way to deal with this will Europe have a chance for a future as a political entity.

      But I digress. Well, those are my visions for the development of the European Union. I’m well aware this is only the most basic framework and that much work has to be done to get the statics right. The construction will necessite many pragmatic decisions and ideological preferrences shouldn’t trump Realpolitik. However (and maybe this is just an unusual attack of optimism), I don’t see why it shouldn’t be able to create a stable system, based on experiences of the past (federate nations like the US and Germany) coupled with new solutions. What other reasonable alternative do we have, really? The 21st century sees the emergence of new superpowers, populations that are much more numerous than even the largest nation here. And if we don’t unite in solidarity, we Europeans will be pawns in their global powerplay. Only if we concentrate on the values and ideals that unite us will we be able to make a stand in this new world. Here’s hoping we’ll rise to that challenge.

    • @Gray

      Here is his essay: http://www.economia.esalq.usp.br/intranet/uploadfiles/539.pdf

      His findings indicate that for a long time there has been a trend of increased trading relations between similar economies in contrast to trading between different economies.He further states that in the last 2 decades this trend has changed and he presents figures indicating the increase in trade between US and China.I dont see anywhere any comments about wealth being equally spread or anything like that.You are more than welcome to look at the essay yourself and specify where is he talking about equal wealth etc.

      Furthermore in his slideshow presentation he says:
      “Problems facing workers in advanced economies:
      Increasing inequality
      Decline of “good jobs”
      To some extent, both may be explained by the
      decline of increasing returns as a force in the
      world economy”

      But even if we take Krugman off the discussion,i was wrong to use the word “ever”.I should rather say until now such equality doesnt exist.This doesnt mean it can never happen in the future,but imho if the current state of mind doesnt change, i dont see it ever happening.Furthermore increased trading between US-China doesnt necessarily mean wealth equalization between the two.After all China has been booming because a huge amount of investment leaves the west towards the east due to way lower wages and nevertheless its income parity is alive and well.

      Unless im missing anything Krugman tries to explain the switchings of trading trends rather than changes in wealth distribution.

      “And imho the defeatist view, that an underdeveloped region can’t rise up to the standard, isn’t helpful at all. Greece needs more motivation to improve itself and less of the whiny conviction that “it’s all useless anyway, we’re just pawns of outside powers”.”
      Then Africans arent pawns…they are lazy.. right ?We have our pretty IMF and World Bank giving them such favorable loans for ages and they are still falling back,the lazy bastards.
      Gray im not really in the mood of arguing about whose fault it is again and who is not working enough or whatever.The gold standard created the same problems and we didnt learn from it obviously.Every country is effectively an optimal currency area.Unfortunately any optimal currency area has certain attributes that are more easily applicable to individual countries.Unless any group of countries is ready to apply the rules to enable these attributes,then sooner or later problems like the current ones show up and as i’ve said to No EU Dictatorship these countries should not follow this path.Thats all i have to say about the matter.

      I more or less agree with the rest of your ideas but i dont agree that subsidization is wrong.Ever wondered whether there was an actual subsidization or that was just what they called it ? Misusing subsidization is one thing,calling it all wrong is another.Its like saying communism is bad or capitalism is bad while their principles were never actually practised at all rather they were/are distorted in order to satisfy a few people.

    • Dean, I am so happy that you finally discovered the McKinsey Report which first came out mid-last year and about which I had posted (also in this blog).


      And I am even happier that you discovered the website of the Bank of Greece with its statistics. You may remember that I had referred you to this site several months ago when you argued to “give the lenders the shaft and I will have this country fixed within 2 years”. I recommended that, before you do that, you should figure out where Greece would get at least 10-15 BEUR a year from to finance its current account deficit (not to mention the financing of the capital flight). Your reply then was that you didn’t want to bother with details.

      I am impressed how much Greek brainpower is devoted to solving other people’s problems, i. e. the European debt problem. I would be even more impressed if I saw that at least some Greek brainpower were applied to solving the problems of Greece. Apart from the McKinsey Report, a similar report from Roland Berger and the reports from the EU Task Force, I have not seen anything from the Greek side which could be interpreted as policy proposals how to turn the Greek economy around. Not even the parties seem to be making proposals even though there is an election campaign going on.

      Greece will have no future as long as the leadership and the people do not make themselves the owners of the challenge. Just blaming others ain’t good enough; not to mention that this is childish and not mature. I have recently read the booklet “About the Misfortune of being a Greek” by Nikos Dimou and that has helped me understand some of the reactions (also in this blog) which I totally disagree with. I was also glad to read the Kathimerini commentary linked below.


    • Why would anyone think about how to help himself as long as the gravy train from Brussels keeps coming?

  • I don’t trust any international elite that can turn entire countries into Fois Gras dishes without the slightest guilt.
    I want out of this.
    Ireland & Spains people, landscape & soul have been destroyed.

  • Wow, never getting tired of finding new proposals to loot the treasure chambers of other countries.

    Why not propose a real default? Why let the bankers get away and impose their losses on the tax payers? It will only result in animosity between citizens in the North and the South.

    We need less government involvement, not more. Simple is always better: Default, reset, new start.

    Iceland is a great example. They are doing just fine.

    • I have a request for you: If you are to criticise me, which I welcome, please look into my position first. I have been a proponent of a real, unambiguous Greek default since January 2010. My proposal is intended as a means of saving the eurozone in a manner that the surplus countries do not pay for its ‘salvation’. You may prefer that the eurozone is dissolved. And you may disagree with my proposal’s technical merits. But before you criticise it is a good idea first to understand that which you… criticise.

    • Yes, but your proposal does not make that position clear. Now it is not about Greece anymore. Greece has more or less defaulted. What needs to happen now is that Greece defaults and the other countries too. Otherwise there will be no reset.

      All plans and “bailouts” (which are actually a switch from private creditors to public creditors) will fail. The reason is not so much the concept. The best concept will be misused by politicians and lots of money, time & good relations will be wasted.

    • It never was about Greece. Just visit my Euro Crisis page and you will see that this blog was established to talk about the eurozone as a whole. On another note, you write: “The best concept will be misused by politicians and lots of money, time & good relations will be wasted.” Perhaps you are right. But why is this not also true about politicians within a nation-state? Why can Europe as a whole prove better at constraining and restraining politicians than individual countries are?

    • “But why is this not also true about politicians within a nation-state?”

      This is even true on the local level! The issue is that the more you move away from the subsidiarity principle the worse it gets. At the EU level the money always comes from somewhere. these Eurocrats are too far away from the people whom they rob the money off (taxpayers).

      It might well be that the waste ratio and misallocation ratio is higher in some countries on thelocal level than what the EU level is. BUT these are one offs. In DE, FI and North Italy things are pretty well sorted out on the local level.

  • Folks, pls read this excellent article:
    “There is an Alternative! How Spain could pursue expansionary Policies: by Vicente Navarro”

    Such specific, realistic proposals for reducing deficits in a socially fair way that doesn’t strangle the economy are worth much more than bold plans that won’t find any political support. Greek left wingers should study this and use it as a base for developing their own crisis policies. It doesn’t have to be the Troika way, it’s the results that count! As long as the fiscal situation improves, the creditors have no reasonable grounds to complain!

  • Pr. Varoufakis
    In Your article at Protagon on 10/02/12 (http://www.protagon.gr/?i=protagon.el.article&id=12532) You argue that if the CDS of the Greek debt are triggered there will be “a chain reaction of several megatons”. Well the CDS have been paid and nothing like that has happened, care to explain why were you wrong? If Greece declares default as you propose by not taking any more loans from the Troika you hope that the rest of the eurozone members won’t force Greece out of the euro because this will eventually lead to the break up of the eurozone, so Greece has a leverage to negotiate better terms with them. Is this a prognosis like the one with the CDS?

    • This is indeed what I had predicted on 10th February. But I had also predicted that the CDSs would indeed be triggered, despite the troika’s better efforts. After that article was written, on 29th February, the ECB did two things: It pumped, as part of LTRO2, 520 billion euros into the banking sector and, far more importantly, allowed BNP, Societe Generale and several other banks that had blended Greek CDSs together with bank private bonds (in the form of highly leveraged synthesised derivatives) to post these piles of toxic waste onto the ECB as collateral, in exchange of printed cash. The total sum, according to my sources, involved was 270 billion euros – which, compared to the less than 2 billions that the CDS payouts amounted to was, indeed, a ‘chain reaction of megatons’. So, this is why the triggering of the CDSs went smoothly: the ECB stepped in and swallowed these bombshells, which now live in its cavernous balance sheet. What does this say about a possible forced exit of Greece? Might it be an ‘event’ that, once more, the ECB can defuse? Considering the fact that Greece now owes 130 billion to the rest of the eurozone, and another 60 to be IMF, plus the fact that under Target2 the Bank of Greece is indebted to the Bundesbank and the Central Bank of the Netherlands to the tune of 145 billion, the sums involved are large but not impossible per se. However, the fact that Portugal and Ireland add to this equation another 400 billion in aggregate, as well the questionmarks over the potential of a third LTRO, it is clear to me that the ECB would never dare cut Greek banks off in case of a Greek default (for this is the only way that Greece can be thrown out – to stop dripfeeding Greek banks). In any case, if would have a serious legal problem if it tried to do that would embroil Italy’s and Spain’s banks. In short, I stand by what I wrote. The ECB had to go to extraordinary lengths in order to contain the Greek CDSs. It will not, however, have the capacity to extinguish the much larger fire that will be ignited by a Greek forced exit.

  • @yanisv

    270 billion of CDOs involving CDS of the Greek debt is a indeed a very large amount, do you have any proof that this is the case?

    The ECB and the European authorities have proved that they can manage an orderly default of a member state, why do you think that they cannot manage the exit of one from the euro? The amounts you describe in the case of Greece (130 +60 + 145) are not that large, nothing that the ECB cannot handle and there is talk of ring fencing the rest of the Eurozone by pumping more liquidity to the banks or the states via EFSF. Do you still think that Greece can pressure Germany into better terms because of the danger of a Eurozone break up if they don’t play ball?

    • Yes I do have proof. But not able to share it on the internet. The ECB does not think that it can ringfence Italy and Spain after cutting loose Greek banks. Thus, the answer to your final and most crucial question is: Absolutely! If Greece insisted on defaulting fully and asked the German parliament not to approve any more bailout loans, Germany could do nothing to kick Greece out, given the ECB’s point blank refusal to cut off Greek banks. That way, the Greek state would learn to live within its means and debt would start coming down, as the great new loans would be kept at bay. Moreover, the German taxpayer would suddenly appreciate the Greek government for its courage to say no to new loans it cannot repay. Germany’s politicians would then be cornered into accepting Greece’s new full default status.

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