A reply to Kantoos Economics on the merits of the Modest Proposal

Kantoos Economics recently honoured me with an invocation to its readers to read my musings on the Euro Debacle, and to judge them critically. I thank Kantoos Economics for a simple reason: The one precious lesson that 1929 ought to have taught us is that after a Wall Street catastrophe, which is followed by a world recession, two things tend to ensue – first, the painful fragmentation of common currencies (the Gold Standard then, the euro now) and, secondly, a Hobbesian war of all against all. Already we notice (even in the pages of my personal blog), that our economic woes are turning one proud people against another. Germans point the finger at Greeks, Greeks dig deep into the memory bank to portray Mr Schauble as a Nazi (when the Nazis are in our Athens Parliament!); soon the Greeks will turn against the Greeks and, yes, the Germans against the Germans. A well meaning dialogue between Europeans whose top priority is to arrest this Crisis is the only, and best, solvent of this debilitating tension.

Let me now turn to Kantoos Economics’ (KE hereafter) critique of our Modest Proposal. First, I note with considerable satisfaction that KE is in agreement with our Policy 1 regarding bank recapitalisation. However, regarding Policy 2, KE is unimpressed by our suggestion that the ECB acts as a go-between member-states and international money markets (through the issue of ECB-bonds). I shall quote verbatim KE’s objections and try to address them directly:

In essence, Yanis says that jointly and severally guaranteed Eurobonds are not the answer because they involve transfers from core to periphery taxpayers.

My point is a little more… pointed than this. It is that not only does it involve transfers but, to boot, that these transfers are inefficient. Jointly and severally guaranteed eurobonds are a little like an inefficient water mains that spills a lot of water before it gets it to our homes. The reason is that, given the markets’ tumult, when a bond is guaranteed jointly by, say, Germany and Portugal (to give a simple example) market players will be more put off by the mention of Portugal than they will be attracted by the ‘news’ of Germany’s backing. As a result, the interest rate that such a bond will fetch will be, for a given degree of true ‘risk’, too high for Germany and not low enough for Portugal.

[Yanis] claims that he has found a way around this, by having the ECB issue bonds on the member states’ behalf, have the states pay off their debt at the ECB, and have the EFSF/ESM guarantee the losses of the ECB “in the remote case that some members do not redeem its bonds in the distant future”.

Permit me to put this a little more accurately. First, we do not propose a blanket servicing of the member-state’s debt by the ECB. Our proposal concerns only what we call the Maastricht-compliant part of the member-state’s debt. This is important because it answers the moral hazard concerns of many and puts an upper bound to the ECB’s obligations under our scheme. In short, member-states only receive the ECB’s assistance regarding the debt that they were ‘allowed’ to have by the original Maastricht Treaty. All other debt is excluded from the ECB-debt conversion that we are proposing.

Secondly, the ECB services the Maastricht-compliant part of each maturing bond of member-states by issuing its own ECB-bonds and, simultaneously, opening debit accounts for the participating member-state into which the latter must repay, in the fullness of time, the money necessary for the ECB-bonds to be redeemed. Member-states that opt to participate in this ECB-debt conversion scheme do so under certain conditions. Not willy-nilly. One condition is that the member-state signs a binding contract with the ECB that their debt to the ECB (to the debit account mentioned above) will have super-seniority status over all other liabilities. Other conditions may be added so as to maximise the debt conversion’s credibility; e.g. member-states may be asked to make annual, or even quarterly, payments into their debit accounts over the 10 or 20 year period that leads to the maturation of the ECB-bonds issued on their behalf. That way, the repayments are smoothed out, amortised even, and the probability of default by the member-state to its ECB debit account tends to zero.

In other words, even if Italy or Spain were to default in 10 or 20 years time (when an ECB-bond issued on their behalf matures), they would have to default on all other creditors (e.g. holder of government bonds that were not converted by the ECB, since they were part of the ‘red’ debt that was not eligible for the ECB’s debt conversion) before failing to pay their debt back to the ECB. And even then, the shortfall will only be a small fraction of the monies owed since they will have being repaying the ECB in small doses over the years. The benefit of this is twofold:

  1. It ensures that the ECB’s bonds are almost default-proof, thus ensuring that the interest rates of the ECB bonds will be tiny (and, ergo, the interest due by the whole of the Eurozone on its aggregate Maastricht-compliant debt) while,
  2. It increases the pressure on the member-states to put their house in order since investors, knowing that the member-states’ debt to the ECB enjoys super-seniority status, will demand high interest rates to lend them over and above the Maastricht level.

In short, super-seniority and provisions for smooth, amortised, repayment by member-states to their ECB debit accounts offer an ironclad guarantee that no member-state would default against the ECB – just like almost no country has ever defaulted against the IMF (which makes sure that the super-seniority clause is active in regard to its loans).

But to make our ECB-administered debt conversion plan even more ironclad, we have added the provision of the EFSF-ESM providing the ECB with insurance in case even one euro owed the ECB by a member-state goes ‘missing’. After all, was this idea not part of the December 2011 EU Summit agreement (that the ESM would be offering insurance on 20% of member states’ government bonds)? The principle of the EFSF-ESM offering insurance protection to member-state creditors has thus been established. All we are suggesting is that the said principle is incorporated into a scheme that makes rational sense. Indeed, I submit it to you, dear reader, that our suggestion (that the EFSF-ESM insures the ECB against the minuscule risk that, despite super-seniority and amortisation, some of the member-state’s debt to their ECB debit accounts will not be repaid) stands head and shoulders above the ludicrous December 2011 EU Summit agreement on ESM-provided insurance of Italian and Spanish bonds.

How is this different from a jointly and severally guaranteed Eurobond? 

I think that the above has already answered this question. The answer is: Stupendously different! Indeed, the two (our suggestion from jointly and severally guaranteed eurobonds) are like chalk and cheese. Here are two eye-glaring differences.

  1. Jointly and severally issued eurobonds will be backed, partly, by weak member-states without any of the security that our scheme provides via (a) smooth amortised repayments, (b) super-seniority status over other weak member-states’ debts to the Centre (for if they did have that status then all of a sudden bunds and other surplus countries’ bonds would, suddenly, become inferior to the eurobonds, thus becoming far less attractive to investors), and (c) the EFSF-ESM insurance scheme which cannot work with jointly and severally guaranteed eurobonds
  2. Jointly and severally issued eurobonds require both a Treaty Change and a new federal-like institution that will issue them. They may also require a change in the German Constitution. In short, jointly and severally issued eurobonds cannot happen. Period. But is this different with ECB-bonds? Is there no legal impediment? Yes and no, respectively. If the ECB were to issue its own bonds, without any backing whatsoever from Germany, Holland, or any other member-state, then there is no violation whatsoever of any Treaty of Constitution. And, indeed, there would be no reason to create a new institution to issue them (since the ECB already… exists). The crucial difference here, that KE must note, is that whereas jointly and severally issued bonds must be backed in law by the German taxpayer (thus requiring changes in Treaties and the Constitution), our ECB-bond scheme is backed by contracts between (fiscally-stricken) member-states wishing to make use of this facility and the ECB. No one else (i.e. countries like Germany that may feel no need to make use of this scheme) needs to make any commitment.

The ECB’s role ensures that interest rates on these bonds are very low. This lowers the debt burden of, say, Italy. However, there is no guarantee that Italy will be able to service its debt in the future. Who is standing behind these ECB bonds?

I have already answered this above: It is the Italian taxpayer that stands behind the ECB-bonds issued on Italy’s behalf, the Portuguese taxpayer for the ECB-bonds issued on Portugal’s behalf etc. What makes this ‘backstop” credible? As I have explained above: super-seniority, amortisation and, as a last, last resort, the EFSF-ESM insurance policy.

Either the ECB itself, which means that it needs to be recapitalized (= will transfer lower profits to the governments). Or the insurance by the EFSF/ESM will cover losses. Either way, the other European governments pay. So there is not a big difference here: ECB bonds transfer risks

I think that KE is being far too negative here. Our proposal does precisely the opposite of pushing the ECB into paying for the member-state’s debt. It tries to reduce the ECB’s liabilities by giving it an opportunity to manage the Crisis rationally. As things stand, the ECB system, under Target 2 and ELA provisions, is ending up with countless billions of liabilities that are never to be repaid – especially now that the Crisis is running amok (and if Greece exits, willingly or otherwise). Our scheme will arrest the Crisis and give the ECB a sporting chance at putting the lid on what, presently, amounts to a galloping exposure on unsustainable debts on its balance sheet. (Imagine what will happen to the ECB’s balance sheet if Spain blows up?)

Similarly, with the core countries’ governments. At the moment they are pouring money down into a black hole – e.g. the bankrupt Greek government which was made by the troika to borrow  4.2 billion from the EFSF in order to repay the ECB for bonds the later purchased, at a large discount. How sustainable is this (independently of which government we Greeks elect in June)? Compared to our proposal that the EFSF-ESM bear a very, very small risk (insuring the ECB’s debit accounts in the manner described above), what is happening now is plundering the German taxpayer not to give to the Greeks and to the Irish but, instead, to throw it all away into the black hole also known as our current ‘fiscal consolidation’ plan.

Where I can see a difference is in interest rates: Eurobonds will have yields above German rates (some weighted average of all Eurozone yields), whereas ECB bonds will probably have German rates, so Germany won’t pay more than before. Fair enough. But the problem here is that ECB bonds might increase the yield on other bonds. Sounds silly? It is not. If the states have to recapitalize or insure the ECB, these countries’ risks increase.

If states had to re-capitalise the ECB, that would be so. But this is not so. Indeed, under the Modest Proposal they would be spared of any need to recapitalise anyone – unlike what is going on now, i.e. a process that guarantees that the German, Dutch and Finnish governments will have to re-capitalise everything in sight (banks, ECB, EFSF-ESM) without even any success in stopping the fragmentation of the Eurozone. Markets know this. So, the very announcement of a scheme like the one we are suggesting will reduce significantly the fear of hefty recapitalisations.

The ECB bond is just a Eurobond with a higher seniority, if you want: the loss-absorbing capacity of the ECB is around 2,000 – 3,000 billion euros, but this capacity is directly related to government revenues. ECB bonds will therefore be repaid first, at the expense of the government revenues that are available for other bonds. This leads de facto to a lower seniority of the normal bonds, which as we all know leads to a higher yield on these junior bonds. So by giving out ECB bonds, the yields on other bonds are likely to increase.

I have already said so myself – see above. The difference is that this is a strength, not a weakness, of our proposal. Since we divide each member-state’s debt between Maastricht-compliant and the rest, and suggest that the ECB manages the former but not the latter, it would be rather helpful if a ‘healthy’ interest rate spread emerges between the two classes of debt making sure that, while the Maastricht-compliant debt of fiscally-stricken member-states is cheap to refinance, there is a market determined premium to pay for excessive public debt. Moreover, this spread will differ depending on the member-state. In Germany’s case, for instance, (which also has a debt overhand, in relation to Maastricht limits) the interest rate spread between ECB-bonds and bunds may even be negative at first, until markets begin to believe that the Crisis is over and the chances that the Eurozone will break up have receded to zero. In the case of other countries, the spread will be positive and analogous to the efforts of the government to rein in its debt. What is wrong with that?

Yanis would have to make a more convincing case that by having the ECB issue bonds, some risk is taken out of the market, and are not just redistributed like in the case of Eurobonds. But where? There might be a safety and liquidity premium for ECB bonds that lowers yields overall, which the Eurobonds do not have to the same extent (as they are by no means perfectly safe). There might be other reasons, but in my view ECB bonds are not a silver bullet, and very close to the commonly proposed Eurobonds.

I have already explained why our ECB-debt conversion scheme has a structure that puts clear blue water between ECB-bonds and jointly and severally guaranteed eurobonds (not to mention again their merits from a legal perspective). All I want to add here is that the creation of ECB-bonds will have an extremely positive effect in international money markets – one that we should not ignore. Sovereign wealth funds, private investors in, say, Japan etc. know and respect the ECB trademark. This gives ECB-bonds a drawing card that is crucial. Of course smart investors look beyond logos, and like to delve into the details. But if the details are as outlined above, investors far and wide will find these ECB-bonds extremely attractive. Capital will flow back into the Eurozone; capital that has fled over the past two years of Crisis mismanagement. ECB-bonds will thus play an additional role: that of shoring up the euro’s claims to reserve currency status (in addition to the US dollar). In summary, while silver bullets do not exist, this is a very promising scheme which deserves serious consideration by politicians and bureaucrats who have not covered themselves in glory over the past two years…

[Yanis] conclusion is that Germany refuses his proposal…

… [f]irst, because Germany does not really want interest rate relief for the struggling Periphery. For some reason, which I shall not elaborate on here, Mrs Merkel feels that fiscal waterboarding is what the Periphery needs more of these days.

Secondly, because such a scheme would mean that Germany would lose its capacity to leave the eurozone as a common debt external to the European System of Central Banks will be born by the ECB, thus making it impossible for any member-state to up stumps and leave the euro. Such a loss of its ‘exit card’ (that only Germany truly owns) will reduce the German chancellor’s bargaining power, within the eurozone, inordinately 

I think both are incorrect. The pressure on the countries in the periphery has certainly helped to change their domestic policies, and I am sure Yanis agrees. More pressure is surely not in Germany’s interest, as it threatens to break up the Eurozone, which would be very costly by almost any calculation I have seen. The second aspect sounds very weird to me: a German exit is surely not the main reason why Germany has bargaining power. A German exit would be extremely complex, legally nigh impossible, and threatening Germany’s industry that just recovered from several negative shocks (reunification, globalization, EU enlargement, higher financing costs).

On the first point: Mrs Merkel told us only the other day that her objection to eurobonds is that they will reduce interest rates; something she said is counterproductive because it takes countries like Italy and Spain off the hook. So, my explanation is correct. KE may agree with Mrs Merkel (that high interest rates must be maintained as an incentive) – but this only means that KE agrees with the first reason I gave as to why Germany is resisting proposals such as ours. Where KE may legitimately disagree with me is with my term ‘fiscal waterboarding’. I stand by it for the following reason: In my estimation, waterboarding by the CIA and its operatives was both a violation of common human decency and ineffective (in that torture provides a lot more misleading ‘information’ than useful tips). It is my considered opinion that what is happening today in places like Greece and Spain is, just like waterboarding, both inhuman and inefficient. From experience, I can tell you dear reader that the severity of the cutbacks in Greece have reduced our society’s capacity to reform. How come? In two ways.

First, reform requires investment. Any CEO will tell you that to improve management structures one needs to invest in them. Greece, Italy, Spain et al are so busy cutting that no investment goes into genuine reforms.

Secondly, the cruelty of the austerity packages (that is evident for all who have eyes to see, and want to use them) destroys the common will to effect reforms. This we can only neglect to our peril. In short, if Europe were to adopt a sensible, humane, pan-European Recovery Plan (like the one we are outlining in the Modest Proposal), the chances of genuine reform would be boosted. At present, fiscal waterboarding is stealing the thunder of reforms and identifying the concept of reform with misanthropy – not unlike the way in which democracy was given a bad name under Yeltsin’s rule in Russia or after the US invasion of Iraq.

On the second point: KE is correct to give all the reasons why Germany does not want to get out of the Eurozone. These are legal (it would have to renege on its Treaty obligations with the EU), economic (serious hardship looms if a new DM is created, is revalued massively and, thus, leads to the loss of export markets) and, not to be scoffed at, political-cum-psychological (being part of Europe is crucial to Germany’s postwar perception of itself, its raison d’ etre). But this is not my point. My point is not that Germany plans to exit the Eurozone. No, my point is that, courtesy of being a surplus country within a common currency that is in Crisis, the fact that it can leave the Eurozone (i.e. an announcement that it will leave will cause a capital flight into Germany, independently of the fact that it does not want to leave, and of the other costs it involves) gives it an enormous bargaining advantage in relation to, for example, France or Italy which cannot leave whether they want to or not (courtesy of being in deficit, a fact that ensures a capital flight from them if they announce such a move). To put it bluntly, Germany possesses an exit card that others do not possess. It neither wants nor intends to use it. But by merely holding onto it, Berlin can silence the rest in the EU Council meetings. Adopting policies like those in our Modest Proposal is equivalent to giving up this precious exit card and the huge bargaining power it affords the Chancellor. Mrs does not feel she has the political, even the moral, authority to give this much bargaining power up (at least not lightheartedly). In a way, I understand this. Alas, by keeping this exit card, the Eurozone is sinking and, soon, it will be worth precious little!

Yanis writings on the Euro Crisis are important for me because they challenge my thinking, and I like that. But except for the banking aspect, I am having trouble with some of his views. Besides the above on ECB bonds, I disagree with…

  • … his tendency to blame Germany for economically exploiting Europe. That is a very one-sided view of what Germany’s economic development is about, and why it developed the way it did. So far, Germany has not gained from being in the euro (contrary to what is written again and again), and it is likely to foot a massive bill when this whole mess is over (partly self-inflicted, I know, but almost surely not the major part of it).

I must protest. My top priority has been, from day one, to fight against the ‘blame game’. Indeed, wherever I speak and whomever I am addressing, I repeat ad nauseum that we must do our utmost to stop blaming one another. I even go so far as to say that there is no such thing as ‘the Germans’ or ‘the Greeks’. See for instance this piece and this, related, video documentary of mine. 

Having said this, I disagree that Germany has not benefitted from the euro. Of course it is all a matter of how one defines ‘Germany’. I have no doubt that large numbers of German hard-working workers have not benefitted from the euro, judging by the rise in the proportion of working-poor Germans. But that Germany has benefitted in aggregate, there is no doubt. Where I agree with KE is that, if the Eurozone collapses, Germany will pay perhaps the heftiest price. Come to think of it, my criticism of the German government’s attitude toward Greece’s fiscal woes, in an article I wrote back in 2010, was that it had a tendency to impose upon it a new form of ‘Versailles Treaty’, a ‘bailout’ agreement which would, eventually, end up doing more harm to Germany than to anyone else. In fact, I concluded that article with the following words which I hope will not prove prophetic (even though I fear they will):

In this context, turning countries like Greece into sundrenched wastelands, and forcing the rest of the Eurozone into an even faster debt-deflationary downward spiral, is a most efficient way of undermining Germany’s own economy. Assuming, for argument’s sake, that Greece is getting its just deserts, do the hard working Germans deserve a political elite that quickmarches them straight into economic catastrophe? [A New Versailles Treaty is Haunting Europe, 2010]

  • … his tendency to make this Euro Crisis look like an easy-to-solve problem which is not backed-up by any theory or evidence from the past, as far as I know. It is a full-blown mess (on a continent with legally mandated free capital movement) that is and always was very difficult to solve – including the question what a “fair” distribution of the burden looks like, irrespective of the usual moralizations.

Here I shall disagree profusely once more. This Crisis was extremely easy to prevent and, once it started, quite easy to arrest. It constitutes a spectacular failure of our politicians. Technically, it was no big deal. We needed to deal swiftly with the banks (by creating a Euro-TARP, and leaving national governments out of the equation), with debt (by having the ECB manage it rationally – as opposed to dumping it, eventually, onto the ECB without any plan and after it had grown inordinately) and with investment (by energising early on the European Investment Bank). Yes, it is true, there is no evidence of that. Why? Because the Eurozone happens to be the first such experiment in human history. It is like arguing that Apollo 11 ought to have left Earth for the Moon only after we had proof from past experience that we can land men on the Moon.

Now, don’t get me wrong. I am not suggesting that planning for a common European future is straightforward. Of course it is not. It is damned hard and complicated. But to arrest this Crisis was dead easy. By accepting, as KE does, that it was too hard and complex, we are simply giving undeserved absolution to our awful, idiotic politicians. They do not deserve it.

  • …  his diagnosis that Europe suffers from an under-investment crisis. That is a strange view given that Greece, Ireland and Spain received massive EU and capital market help to over-invest in infrastructure and real estate in the past. Europe suffers from a lack of smart investment and even more importantly, from a lack of efficient, growth-promoting institutions. If he meant to say that the periphery (and the Eurozone as a whole) suffers from a lack of aggregate demand (AD), I fully agree with him. But again, there are problems withdividing up AD in the Eurozone, and above all, a problem with getting the ECB to stabilize aggregate demand, and not headline inflation.

I am stunned! Every Crisis is preceded by an investment spree. The Great Depression was preceded by the investment flourish of the 1920s. This does not mean that, post-1929, there was not a dearth of investment! The fact that a tsunami of capital flowed into Europe’s Periphery prior to 2008, does not contradict the observation that, today, we have negative investment in the Periphery – and extremely low aggregate investment in the Eurozone. Of course we need smart investment (unlike the silly investments of pre-2008 in real estate and white elephants). But none of this challenges my point that Europe is now suffering from serious under-investment. 

Anyhow, let me finish by re-iterating that debates like this one are the only solvent of the alliance of nationalism and idiocy which are currently eating away at Europe’s foundations. I thank Kantoos Economics for the opportunity.

46 Comments

  • Thank you both for the helpful debate!
    I still wait though for a comment on the proposal of the German economic council for the solution of the financial crisis. Merkel’s conservatives and liberals seem to approach it those days (the solution has to come from Germany you see…):

    http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/download/publikationen/working_paper_02_2012.pdf

    http://www.sachverstaendigenrat-wirtschaft.de/schuldentilgungspakt.html?&L=1

    • It is a terrible, terrible idea. It has no saving grace whatsoever. I loathe the thought of having to waste time writing about it. But, naturally, I shall do it- only because so many people in Germany are deluded into taking it seriously.

    • Hmm… redemption fund, Let’s ask the OED.

      “Redemption: Humankind’s deliverance from sin and damnation by the atonement of Christ.”

      There we are: the Germans will deliver us all from our sins (as long as we do as we are told). Pity they could not get Christ to manage the fund, but never mind.

  • ΑΡΑ, ΤΟ ΘΕΜΑ ΜΑΣ ΕΙΝΑΙ ΝΑ ΕΡΘΕΤΕ ΚΑΙ ΕΣΕΙΣ ΕΔΩ ΝΑ ΠΕΙΝΑΜΕ ΟΛΟΙ ΜΑΖΙ ,ΕΝΑ! ΔΕΥΤΕΡΟ, ΝΑ ΑΦΗΣΕΤΕ ΤΗ ΘΕΣΗ ΤΩΡΑ -ΤΩΡΑ (ΣΑΣ ΘΥΜΙΖΩ ΚΑΚΟΜΑΘΗΜΕΝΟ ΠΑΛΙΟΠΑΙΔΟ; ) ΚΑΙ ΑΣ ΜΕΙΝΕΙ ΚΑΙ ΚΕΝΗ -ΣΙΓΑ ΜΗ ΜΕΙΝΕΙ!!ΕΓΩ ΘΑ ΤΗΝ ΠΑΡΩ! ΤΙ;;; Ο ΚΟΣΜΟΣ ΧΑΝΕΤΑΙ; ΚΑΙ; ΑΦΟΥ ΠΕΙΝΑΜΕ ΜΑΖΙ ΚΑΙ ΠΗΡΑ ΚΑΙ ΤΗ ΘΕΣΗ ΟΛΑ ΚΑΤ’ΕΥΧΗΝ. ΔΕΝ ΕΧΩ ΙΔΕΑ ΑΠΟ ΟΙΚΟΝΟΜΙΚΑ ΠΑΡΑ ΜΟΝΟ…

  • ΤΟΥ ΣΠΙΤΙΟΥ ΚΑΙ ΤΗΣ ΤΑΞΗΣ ΜΟΥ. ΞΕΡΩ ΟΜΩΣ ΟΤΙ ΧΑΝΟΜΑΣΤΕ, ΓΙΑΤΙ ΚΑΜΜΙΑ ΟΙΚΟΝΟΜΙΑ ΔΕΝ ΠΕΡΙΕΧΕΙ ΟΥΜΑΝΙΣΜΟ. ΟΛΑ ΜΕ ΤΟΝ ΠΡΩΤΟ, ΚΑΙ ΤΩΡΑ ΠΟΥ ΟΙ ΤΕΛΕΥΤΑΙΟΙ ΜΑΖΕΥΤΗΚΑΝ ΠΟΛΛΟΙ, ΤΟ ΚΑΡΑΒΙ ΤΟ ΤΡΑΒΟΥΝ ΣΤΟΝ ΠΑΤΟ! ΚΑΙ ΣΤΟ ΕΝΔΙΑΜΕΣΟ ΟΙ ΜΙΖΕΡΟΙ ΚΑΙ ΤΑ ΖΟΜΠΙ ( ΚΑΠΟΙΑ ΑΛΛΗ ΦΟΡΑ ΘΑ ΣΑΣ ΓΡΑΨΩ ΓΙΑ ΑΥΤΑ) ,ΤΡΩΜΕ Ο ΕΝΑΣ ΤΗ ΣΑΡΚΑ ΤΟΥ ΑΛΛΟΥ ΛΕΣ ΚΑΙ ΕΧΕΙ ΣΗΜΑΣΙΑ ΠΟΙΟΣ ΘΑ ΦΤΑΣΕΙ ΟΛΟΚΛΗΡΟΣ ΣΤΟΝ ΠΑΤΟ…ΓΙ’ΑΥΤΟ ΠΑΡΑΚΑΛΩ ΑΚΟΥΡΑΣΤΑ ΣΥΝΕΧΙΣΤΕ ΤΟΝ ΚΑΖΑΝΤΖΑΚΙΚΟ ΣΑΣ ΜΟΝΟΠΑΤΙ ΕΣΤΩ ΚΑΙ ΜΕ ΤΟ ”ΣΤΕΜΜΑ” ΤΟΥ ΗΛΙΘΙΟΥ ΜΠΑΣ ΚΑΙ ΞΥΠΝΗΣΟΥΝ ΤΑ ΖΟΜΠΙ!!! ΑΛΛΙΩΣ ,ΟΠΩΣ ΛΕΝΕ ΚΑΙ ΣΤΗΝ ΙΚΑΡΙΑ ΠΕΘΑΝΟΥΜΕ ΤΡΑΓΟΥΔΩΝΤΑΣ ΣΑΝ ΤΑ ΠΟΥΛΙΑ!!!!!!

    • Αυτό θα κάνω! (Αφήστε που αν παραιτηθώ κανείς δεν θα πάρει την θέση σου. Κανείς! Απλά θα καταργηθεί εδώ και τώρα. Όπως όλες οι θέσεις συναδέλφων που βγήκαν πρόσφατα στην σύνταξη.) Ευχαριστώ

  • …..and here my 5 cents for what they are worth. It seems to me that the debt crisis has reached dimensions where the above “debt engineering” may kick the can a little but further down the road (not by much though) but may not really contribute to a “solution”. The various debt levels (public/private sector, external, etc. )
    are just mind blowing – using e.g. the metrics of the BBC debt “clock” -http://www.bbc.co.uk/news/business-15748696 – for the “foreign” debt part.
    There must be debt reduction on all levels or by negotiated solutions or eventually by market “action” (inflation, bank failures etc), by bondholders that accept conversion into equities, equity holders get their equity holdings diluted and or by outright debt reduction and or nationalization of banks…

    And again: what needs to be done for these imbalances to stop building again? How can we accommodate an economic model based on exponential growth of consumer spending with finite resources? How will western European countries cope with oil prices continuing their upside trajectories without building (again) massive foreign liabilities? We are facing “limits of growth” far more challenging than those that seem to be considered by the models in the current discussions….Are these huge imbalances (including those relating to income and wealth distribution) the external aspect of far deeper layers of inconsistencies in those “fantasies” of The Powers That Be” that shape the scenery of our modern societies? Can we in Europe just continue as in years past in case there were solutions to the current mess of biblical proportions (and for sure in the US, Japan and many other important countries)?

    Paul, Montevideo

    • One of the best entries I have read in this blog Paul. Totally agree. I hope there are many more like me and you who share this point of view. I am afraid though that there are not. History has shown that a mess of such proportions like the one we are facing now always had terrible outcomes. I really hope for the best but I am very much afraid we are firmly set on a course towards the worst outcome.

    • Do not worry. There are others that agree with you.
      Since they (“leaders”) do not want to just reset and change the system for the better ,we are all still heading for the cliff. Some are already falling.

      Remember when Greenspan admitted that his ideology was wrong after the LTCM crushed?
      Well ,did they regulate the derivatives markets? No
      Will they? No

      Many knew we would come to this.
      But who knew that they would try to parasitically cling on Greece to save their butts. Pathetic little beings.

  • The Modest Proposal is brilliant on economics, but it totally ignores social relations in the new union which will be unable to break up.
    When you build a new mechanism that will have de facto power over member states, you need to address the issue of who is it for and how does it affect class relations.
    How can this scheme work when you don’t have democratic control over the ECB’s policy?
    How does it prevent new speculative bubbles that created the crisis in the first place, what happens to banks that blow up (eternal bailouts Im sorry but are out of the question) and who controls market regulation anyway???
    And I’m sorry but the EU parliament is a fraud.

    How can you address an economic problem without addressing politics first I guess is my question.
    Great work anyway.

  • “Anyhow, let me finish by re-iterating that debates like this one are the only solvent of the alliance of nationalism and idiocy which are currently eating away at Europe’s foundations.”

    Indeed.
    That is ,when one talks with reasonable people.

    For ,when reason is non-existant ,one must make use of one’s lower characteristics to survive.

    I may apologise for my anger ,but i sure am not sorry for it.

  • “One condition is that the member-state signs a binding contract”

    I am afraid such thing doesn’t exist. For instance, the Mastricht treaties are binding contracts but nevertheless they were broken by every nation which signed them. There is no reason at all to assume it would be different with your MP.

    • If you can give me an example of ONE binding contract that wasn’t broken somehow, somewhere over the course of the history of humankind I might start taking you seriously.

      Else, make an argument for the abolishment of all binding contracts.

    • @ Estrangeiro

      Do you read at all what you comment on? I qouted/wrote

      ““One condition is that the member-state signs a binding contract”
      “I am afraid such thing doesn’t exist.”

      and you reply with

      “If you can give me an example of ONE binding contract that wasn’t broken somehow, […] I might start taking you seriously”

      Hm. Well. maybe you have read, but obviously then not understood what I wrote, since it is EXACTLY what you demand. Sorry, can’t take you seriously, for apparent reasons.

    • Estrangeiro is right. Eventually all treaties will be broken. e.g. Germany will never pay for all the guarantees 🙂

    • @VSS

      You are the one that fails to grasp simple ideas.
      You say that the MP is not viable because it would require that binding contracts to be signed. You go on assuming that since there is precedent of broken contracts why would anyone bet they won’t be broken again. Good.
      My point was that it is foolish to dismiss the implementation of the MP based on that possibility. Fear that any contract may not be honored should not electively applied to the MP just to suit your argument unless you are willing to apply the same standard to any or all binding contracts which are the basis for all economic, political and social models.
      For example, does anyone really believe a peace treaty is unbreakable? So, your answer is perpetual war?
      Or, banks should be out of business just because it’s impossible to devise a flawless risk assessment model?

    • @ estrangeiro

      “For example, does anyone really believe a peace treaty is unbreakable? So, your answer is perpetual war?”

      Not at all. Please don’t project from where you stand. My answer is: any treaty is breakable and history proves any will be broken. So chances are, also newly negotiated treaties will be broken. Sooner or later, that is.

      “Or, banks should be out of business just because it’s impossible to devise a flawless risk assessment model?”

      Again: please don’t project from where you stand. And I’ll not answer this question since I did already several times.

  • Please correct me if I am mistaken. Let’s assume that a member-state wants to exit the eurozone (or a number of member-states want expel one or more members). I think that there is no exit clause in the agreement. If a country wants to leave the euro it has to leave the EU as well, or sowe are being told by the media here in Greece. This decision has to be unanimous by all 27 members. Is it not so? If it is so read on.
    Can you please tell me what happens if Germany while trying to exit the eurozone has to exit the EU as well? (and what will happen if another country forbids it?)
    The same problem arises if 26 countries want to expel one (guess which).
    Forgive me for raising such an issue, but I’m afraid that economics, politics, law and … metaphysics have been put together in the blender.
    Thank you for your posts Yanis. They are a liferaft of information in this gale we are all sailing through.

    • Each country can ecide to leave the EU. Others do not have to agree. btw it is debatable if one cannot exit the Euro Zone. Just because there is no regulation on how, it does not mean it is not possible.

      If if it were forbidden, who cares these days? Many laws were broken. Remember Maastricht criteria, no bail out clause?

    • It is not only the economic architecture of the EU that has been badly constructed, but also the political-legal architecture. Historically, the European Court of Justice was instrumental in reinterpreting the EU treaties as not merely being international treaties, but a special new kind of law. The politicians never wanted to be held to binding contracts (and I am talking about the 1950s and 1960s here).

      The same sort of problem exists now. There is no legal exit from the eurozone. There are no easy ways to modify the treaties now that the idiots have brought in 27 countries, without a thought about managing the structure. It will probably end up with the European Court deciding how to deal with this shit, because politicians are talentless amateurs who fuck up everything. The only thing they know and do is make moronic empty speeches and manipulate gullible voters for their careers. It is up to Europe’s professionals to get Europe out of this mess, because the politicians never will.

  • There is never an easy solution to a balance of payment crisis, as it requires a large portion of employees to move from one sector of the economy to another.

    The only “easy” solution would be permanent fiscal transfers from friendly neighbours.

    • Neither is the answer. The only rational answer involved investment flows that move in the opposite direction of net exports. As in every properly functioning currency union.

  • It is also wrong to talk about under-investment in Greece when the current account deficit is close to 10 percent of GDP. That is unless Greece of 2008 is your point of reference. The problem is rather how the inflow of capital is used. As the economy is largely unreformed, the capital inflow is basically just upholding the old system. Mis-investment is a much better description of the situation.

    • Mis-investment is of course the appropriate term for the pre-2008 era. Today the appropriate term is negative investment.

  • @Yanis Varoufakis

    You don’t actually answer the crucial criticism of Kantoos Economics, that the bonds of the ECB having super seigniority will push the spreads of the remaining debt that the states still have to finance directly from the markets, to unaffordable levels. In this way the problem of the debt of a number of countries remain. The other two parts of your plan (direct recapitalization of banks and an European investment program financed from ECB bonds) require a bold, even if unofficial, step towards federalization ( that is a truly European and not fragmented national banking sector with a European guarantee mechanism of deposits) and a radical abandonment of the neoliberal orthodoxies of 30 years that characterize the global economy and enforce the control of the global elites (or the 1%) over the working populations of Europe and the world, or the 99%. Neoliberalism is a class project and not just some (bad) ideas and policies that no longer work. Do you think that these policies are easy to change and from above, without the development, intensification and widening of struggles from bellow, all over Europe? Don’t you think that is time to focus more on how to help develop these struggles and not to formulate policy advices towards some imaginary en-lighted elites or governments? This is pure idealism that does not take on account the antagonistic social and national interests that form the national and European levels that we all live. So there cannot be a policy prescription that will solve the euro crisis and will satisfy both the elites and the working classes of Europe and it is an ideological mystification to argue that there is. A mystification that prevents the subaltern classes to stand up and fight for their survival. And in this fight someone has to lose. Until now we are the ones who are losing. If this is going to change we must formulate a strategy that seeks to defeat and curb the power of the elites and their governments and not to en-lighten them to act in their “true” interests which somehow include our own interests as well…

    • Good point about the super seigniority thing – I’d like to read Yanis’ thoughts about this.

      As for ‘a radical abandonment of the neoliberal orthodoxies of 30 years’: yes, however, for me that clearly means, there is not bank to big to fail, let them die. Just make sure the deposits of the average people, pension funds, life insureances and of course real economy companies are prtzected.

      I am utterly fed up with the perverted anglo-saxon version of capitalism that socialize losses of the finance industry and yes, nations, and privatizes their profits and benefits.

    • @Dimitris

      Given that Greek bond yields started to rise when markets believed that the gvt would have a hard time servicing them,i personally dont see how the seniority status will have such effects.If the whole scheme turns out to make it easier for gvts to service all of their debt then there is no reason for yields of the remaining bonds to rise.Ofcourse they would be higher than the ECB bonds but thats only because these bonds are not subject to the same market forces.

  • I’m German and have been reading your blog for a while – but kind of given up a few months ago when the Greece situation in October 2011 turned from bad to worse.
    I’ve been reading Kantoos though and when he discussed your ideas I found him convincing.
    The debate between the two of you is very inspiring. I admire Yanis’ attitude of trying to avoid the “blame game”.
    I unfortunately don’t possess the economic knowledge to judge wether or not the ECB-bonds could possibly work the way you describe they would. Especially the part that it would not ultimately mean that Germany would carry the risk of over indebted countries.
    If the risk would really be limited to the countries opting to take part in this scheme while still lowering interest rates, that would seem like a magical solution. I don’t believe in wonders so I am very sceptical in principle but also very curious to understand if it could really work the way you describe.

    One thing about German objections to just pouring more money into Greece etc: It seems plausible that the crisis has been mismanaged by the EU and also Germany.
    However, the way Greece (the politicians, the elite and the population) have dealt with this national emergency has not inspired Germans to open their wallet and throw more money into this black hole.
    From a German perspective it looks like Greece is completely unaware of the concept of living within your means (not subsidies received from abroad), the rich carrying their (lion’s share) of the load by simply paying their taxes (as their counterparts in e.g. Germany – grudgingly – tend to do) and generally doing what’s necessary to at least do what you possibly can in order to handle the situation.
    From Germany’s view iit looks like Greece can’t be bothered to save itself from utter disaster. I struggle to understand why. It constantly did too little, too late (and only after receiving threats from the EU, ECB, IMF – you name it). The only way this behaviour makes any kind of sense is when Greece assumes that they don’t ultimately bear the responsibility for their own fate. It is always somebody else: the Germans, the Nazis in WW2, whatever. It’s like a game and the aim is to delay the measures that seem pretty obviously desperately necessary to keep Greece from going under. It just makes no sense when looking at it from abroad. So when they are obviously not interested in saving themselves, why should we be?

    I think this is a strong sentiment in Germany right now. Probably that doesn’t help finding a solution for this mess.

    I guess the chances for something like the Modest Proposal of getting implemented would increase dramatically if Germany got the impression that Greece was not a completely disfunctional country with a reckless elite AND population.

    That seems the core question: are they willing to save themselves – then Germany has to help. Or are they still trying to play games – then this is not going to work and Gefmany would just be stupid in keeping a Greek system going that is never ever going to work.

    • “It constantly did too little, too late ”

      Actually no. Again ,according to OECD ,Greece is the only country that did the cuts as asked and more.
      Not all of the reforms ,but this is true for every country. It is just not possible.
      What bothers the Greeks is exactly the thought process you mentioned (Greeks do not want to save themselves etc.) because you all hear the negatives but do not try to understand the real situation.
      I will again refer to the one and most absolutely ridiculous request of the Troika. This is the concession of sovereignty.
      What can you not understand? WE DO NOT GIVE OUR COUNTRY.
      This is what is most about.
      What ever the situation ,you like it or not ,we are right ,you are wrong.

      If they wanted the debt paid ,instead of asking this they would help exploit the ground. No ,they just want the ground at bargain price.

      Thank you very much.

    • Also ,Germany has not the obligation to guarantee for member-states. The ECB has.
      Your question to your leaders should be ,why ,when you have the choice to follow the rules ,you yourselves break them and we pay for it?
      And the Greeks? And the rest of the southern countries?

      The money sent from Troika are not keeping Greece afloat. They are only for the interest. Greece has the money to function.
      It is rather simple.
      1.Troika gave a forced bailout.
      2.Now we have more debt. (This is no help.)
      3.Now Troika keeps giving money to pay herself from interest.

      Conclusion.

      Greece is a money laundering mechanism while she has the self-sufficiency needed to function.
      One could argue ,get out of the euro then.
      It is not that simple.
      We are the ones blackmailed. Extremely. And we get the bad name too.

      What is happening is a typical IMF scheme.

    • @Demetris
      I agree that the Troika seems to have forced a bailout and default on Greece. The default as such should have reduced the debt – though unfortunately still not to a sustainable level.

      I think (but I am not an economist) that among the many problems two main things stand out:

      1. The debt is still too high for Greece to carry (even after the partial default)
      2. The debt still keeps getting bigger in actual terms because Greece still has a very significant budget deficit

      I thinks what needs to happen (and it would have been helpful for everybody if it had happened two years or more ago) is that finally, Greece has to balance its budget. It will have to do so if it leaves the Euro and receives no further assistance from the EU / ECB anyway. So it may as well try now. I think that if Greece can show some resolve that it is willing and able to take the steps necessary in order to get to some sort of budget balance (servicing the existing debt excluded), this would form some sort of basis for meaningful negotiations with the EU / ECB.

      This will require all sorts of nasty steps – and also to make those people within the Greek society carry their share who have the strongest shoulders (the wealthy and currently undertaxed). It is very hard for foreign country leaders to tell their electorate that we need to pump more money into Greece when those people in Greece that actually possess some assets have moved them to Switzerland, untaxed.

      Still, they were for sure not able to move everything out – there is still property worth hundreds of billions of EUR, etc. There are ways for Greece to get out of this – but the way they’ve tried so far does not work. So maybe try something else and collect taxes. This is a national emergency and you could get way more support from the poorer parts of the population if they saw that the rich also paid their share. Plus, taxing the rich (enforcing taxation and, maybe, charging a “one-time-emergency solidarity tax” of, say, 20% of assets over EUR 100’000, payable over 10 Years) would get Greece out of this mess. That way, Greece would be able to sit at the negotiation table with something to offer to its EU partners other than their permanent threat of self-destruction.

    • I liked your points.
      Actually that is exactly what the Greek people want ,that is why we are trying to change the political scenery.

      But the leaders from their side should have decided (now maybe too late anyway) that since they themselves have done a lot of succesfull corrupted deals in Greece i.e. supported corruption ,they should have stopped hypocricy and defamating a whole nation and without asking from the Greek people to give up the whole country.

      What did they expect? That once the deal got out in the open ,we would just accept?

      My point being that they are all made from the same stuff ,Greek and other leaders (crap) and they wanted the small guy to pay ,from all countries.

      If they hadn’t done this ,things could have been smoother for all. Instead of changing this ,they chose to unleash even more negative propaganda because of their greed.

      If all the citizens of Europe understood that ,we could have changed things faster. But since all people of all countries have evil in their hearts and just wanted to gladly accept media propaganda against a whole nation ,without all the data ,unfortunately we will all get what we deserve and not ,except the big interests i suppose.

      The debt before austerity was 109% debt to GDP ,now is 160%.
      As for the deficit we only have 4b. to cut. Easy is my opinion.
      In other words we have shown the resolve you speak for.
      But they still ask 20b. cuts and what i said above. Impossible.
      We are not playing a game of chicken (at least the people ,i am not reffering to the games of the politicians). It is just impossible.

      Is it possible they do not understand what they are doing? I do not know.
      We already got the bad name though.

      Now it is up to history to restore the truth.

    • Not all people of all countries have evil. That was a generalization.
      My bad.

      I mean we do not think. We are just lambs and we trust the wolves.

  • 1) What I fail to see is why there should be any need for the ESM, Mr. Varoufakis, if your suggestions are implemented. The ECB would issue the bonds, and no other institution, or country, could be a better guarantee for repayment, since the ECB could, if the countries default, simply print the money.
    Weren’t you promising us that northern European taxpayers would be spared of expenses once your suggestion was implemented? Or am I a victim of some misunderstanding here?
    So why do you need, or what use are you suggesting to make of, the ESM in the scenario of your modest proposal?

    2) Since you expect Greece to default, I fail to see how it could even repay the 60%-of-BIP-debt. Are you trying to burden the ECB with debt that you know Greece will not repay, or did I misunderstand your intentions on this particular subject? However that may be, I am modestly alarmed that you you fail to present any cure for the specific economic problems in Greece, which are fundamentally differend from e. g. the Irish problems, in your modest proposal.

    3) For all I know, at the moment Greece has a primary deficit, which is being covered by the IMF and the fellow Europeans. Your modest proposal does, in my modest opinion, not adress the question of who is going to pay for this primary deficit. You claim, after all, that, your modest .proposal lets the German etc. taxpayers off the hook. So then who is ON the Greek deficit hook?

    4) I was rather surprised by your claim that YOU do not approve of, or play, any blame game. Words like “financial waterboarding”, when hurled against the chancellor of my country, leave me with the impression that this extremely derogative term is being used in a effort to morally waterboard the German etc. taxpayers into sending more money to Greece.
    Considering the fact that European taxpayers are already paying for a primary deficit in Greek, and further taking into consideration that this deficit is partly caused by Greek tax evaders, I am definitely not amused about your invective against my chancellor, and therefore against my country.
    But maybe you have some free lunch proposal as to how the Greek state spending can be financed at the current level, without burdening foreign taxpayers.

    5) You claim: “… under the Modest Proposal they [the states] would be spared of any need to recapitalise anyone – unlike what is going on now, i.e. a process that guarantees that the German, Dutch and Finnish governments will have to re-capitalise everything in sight (banks, ECB, EFSF-ESM) without even any success in stopping the fragmentation of the Eurozone.”

    To me, this statement appears to be contradict what you hav said in your modest proposal:

    “With the EFSF/ESM now relieved of its task to fund the public debt of insolvent
    member-states, the largest share of its capital is to be used for the purposes of
    direct bank recapitalisations. These capital injections shall flow directly from the
    EFSF/ESM … “.

    So if Greece would default on its debt (which you assume, and so do I), the fellow Europeans would have to recapitalise at least those banks that would themselves default as a result of the Greek insolvency.
    I do realise, of course, that you under your plan taxpayers money would only be give in exchange for equity to those banks, meaning the shareholders would be disowned at least in part.
    Now a major concern in the European assistance for Greece has been the fear of contagion.
    Are you sure, that disowning the shareholders might not hamper your aim to attract more international capital to Europe? Who can be sure, after all, that Greece – or another country – does not again go bankrupt? After all, Greece, in particular, does have a certain tradition of defaults. And the money it has borrowed in the past appears to not have advanced the development of the Greek economy.
    So in addition to your well-meaning musings about the situation in Ireland and Spain, I am sure your readers would appreciate your well-informed suggestions on how to effect an economic boost for the Greek economy.

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