Fiscal Waterboarding versus Eurobonds: Misrepresenting the latter to effect the former

They came. They talked eurobonds. They left in a miff. Why?

Purportedly because Germany, Finland and Holland believe: (a) that eurobonds mean a fiscal transfer from low interest rate countries to high interest rate ones and, therefore, (b) that such a transfer is illegal according to the Lisbon Treaty and the German constitution.

What Germany, Finland and Holland are rejecting is what is known in the trade as jointly and severally guaranteed eurobonds. That is, bonds issued with the backing of all the Eurozone member-states jointly. Under such a scheme, it is indeed true that the German taxpayer will be subsidising the Spanish taxpayer and this would come into conflict with both the Lisbon Treaty and the German Constitution. But even if it did not (or even if the Treaty and the Constitution were amended), it would make little sense, from a macroeconomic viewpoint, to go down the road of this type of eurobond. Why? Because when both Spain and Germany are backing some form of debt (or bond), the interest rate that the common debt will incur will be some weighted average of Spanish and German interest rates. And this in-between interest rate will prove too high for Germany (at least politically) and not low enough (economically) for Spain. The reader may, therefore, be surprised to read that, on this, I am in agreement with Mrs Merkel: jointly and severally guaranteed eurobonds are not the solution.

The tragedy in all this is that our European leaders resemble a group of kids arguing over how to share a cake because no one trusts the other with the knife. As we, adults, know, there are simple solutions to this problem. Similarly with eurobonds. The solution is indeed stupendously simple: No member-state should guarantee them! Period! That’s it! Not Germany, not Holland, not Spain, none of the national governments. Each government can continue issuing its own bonds without guaranteeing one penny (or eurocent) of the new eurobonds. And who will issue and guarantee the eurobonds? The European Central Bank of course.

The idea (which Stuart Holland and I have been canvassing for over the past two years – see Policy 2 of our Modest Proposal) is that the ECB offers to convert the Maastricht-compliant loan of each member-state by operating like a go-between, effectively mediating between the member-state and the international money markets. The ECB services the Maastricht-compliant portion of each maturing bond of participating member-states using funds it raises itself from the money markets. At once, it opens debit accounts for the member-states it is helping out and into which the latter commit to pay back the money which will redeem, in the fullness of time, the ECB-bonds that the ECB issued on their behalf. (See here for a helpful parable.) To create the market confidence necessary for ensuring rock bottom interest rates for the ECB-bonds, the EFSF-ESM could offer insurance cover to the ECB in case one of the member-states fails to pay sufficient funds into its debit account.

Voila! A eurobond scheme that creates a new, liquid market for euro-denominated debt, that alleviates the financing problems of all fiscally-stricken member-states, and which requires no debt guarantees nor fiscal transfers from Germany, Holland or Finland.

So, why do they not opt for this simple solution? For two reasons that they do not dare say out loud.

First, 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.

And so, Europe’s knickers remain in a knot, while the eurozone is disintegrating fast. 

82 thoughts on “Fiscal Waterboarding versus Eurobonds: Misrepresenting the latter to effect the former

  1. We’re a bunch of volunteers and starting a brand new scheme in our community. Your site provided us with useful information to work on. You have performed an impressive job and our whole community might be thankful to you.

  2. Okay, I’ve meanwhile read your other texts and now I know that the countries are supposed to pay regular ‘installments’ to the ECB. And this money would be again converted into credits to said countries, allowing them to pay their share of EIB-investments.

    However, such investments are to be made under “banking criteria”, meaning the capital will have to be paid back – with interest. (Couldn’t be otherwise, because we are talking about credits to begin with, not grants.)
    While this might work with well-selected infrastructure projects (at least as long as car drivers don’t revolt against having to pay toll, which you seemed to support, in a specific case, in your “Can’t pay, won’t pay” blog entry) I can’t visualize many such projects in the fields of “health, education, urban regeneration”.

    So the possibility to spend ERP means might be somewhat limited, and possibilities for sound investments might greatly differ from country to country.
    Where do you see a big benefit for Greece under these circumstances? Autobahnen don’t seem to be missing, from what I’ve read, airports are there, trains wouldn’t have enough passengers. At least from the outside (and, of course, with very little information) I can’t think of any projects that would immediately help Greece in a big way. Solar energy – okay. But for that you would have to build power lines across the Balkan first: not an easy or quick thing, technically and politically.

  3. “The ECB services the Maastricht-compliant portion of each maturing bond of participating member-states using funds it raises itself from the money markets. At once, it opens debit accounts for the member-states it is helping out and into which the latter commit to pay back the money which will redeem, in the fullness of time, the ECB-bonds that the ECB issued on their behalf.”

    To me, this is a rather opaque proposal, Mr. Varoufakis.

    If I understand you right, the only continuous payments the member states would have to make under your scheme would be the interest rate that the ECB itself has to pay to the bondholders.
    And some far away day, when the ECB-bonds have to be redeemed, the countries would, under their solemn pledge (“commitment”), pay the full amount to the ECB?
    And where would they get the money from?
    From some economic boom, which hopefully will have occurred in the meantime?
    And if it hasn’t, let the surplus countries recapitalise the ECB?

    • From their taxpayers of course. Nothing opaque about the Proposal. Italy will have to redeem these ECB-bonds just like it has to redeem its own. The only difference is that, under our Proposal, the interest rate will be low enough to make it possible for the markets to imagine that Italy can do this. What is so strange about this?

  4. Hi,
    just for me to understand:
    1) From what source does the money for your funds ultimately come from? Not from the member states?
    2) Do you think those Eurobonds alone will solve the problem?
    3) If not what other measures / reforms for greece you consider necessary and how long will they take until they have an effect?

  5. History is repeating itself since the allegedly so modern Western Europe isn’t very different from the old dark-ages Europe! They are ready to kill and subjugate other peoples just for their rotten money, these dodgy bastards!

    Hitler behaved like that, the British and American imperialists did it and Merkel and the IMF do it again now!

    The EU seems to be all about money and domination of the weaker nations.

    http://www.nytimes.com/2012/05/25/opinion/bankers-at-the-gates.html?_r=2&hp

    FEW Greeks have a good word to say about the European banking system these days. They believe it’s the real reason for their current crisis, having pushed easy money on their politicians and now demanding a pound of financial flesh.

    It was the same story 800 years ago. The men of the Fourth Crusade, who had originally set off to fight for Christianity in the Holy Land, found themselves instead ransacking Constantinople, the capital of the Greek-speaking Byzantine Empire, because of enormous debts that had been racked up in the West.

    The way Europe has behaved over the current Greek crisis is scarcely less shameful than the way those crusaders behaved all those centuries ago. If nothing else, that dark spot on the West’s historical record should be a warning to the bankers and politicians who would rather watch Greece fall apart than take responsibility for their own profligacy.

    Greece may be on Europe’s periphery today, but in the 12th century Constantinople was the gateway to a lucrative trade in spices, silks and luxury goods coming from the east. This trade had made fortunes for men across Europe — as the economies of Greece, Spain, Portugal and Italy have done over the last two decades.

    Traders from places like Venice, Genoa and Pisa in the late 12th century managed to win for themselves the sort of advantages and loopholes in Constantinople that bright young fund managers would kill for today: they negotiated positions that allowed them to undercut local traders, alongside smart commercial treaties that let them minimize or even sidestep their taxes. As with modern Greece, this led to a flow of cheap foreign capital into the markets.

    Around 1200, though, things went sour. A sharp contraction of trade in the Byzantine Empire was exacerbated by wild overspending by Venice, the medieval equivalent of a European central bank……….

    http://www.nytimes.com/2012/05/25/opinion/bankers-at-the-gates.html?_r=2&hp

  6. Defective Joy Gene – Study Finds Germans Incapable of Enjoying Life:

    With low unemployment and solid economic growth, things are going better than ever for Germans. But a new study shows they’re practically incapable of enjoying it. Not only do they find it difficult to cut loose and experience pleasure, but their “joy gene” is broken, researchers say……..

    Read more here:

    http://www.spiegel.de/international/zeitgeist/study-finds-germans-incapable-of-enjoying-life-a-834973.html

    • Is it a new study ,because really when i hear about such studies ,i feel nausea.

      Anyway ,even if it is accurate this only proves the problem every so called modern society has. High-level stress and people becoming robots.

      Every human being is looking out of oneself to find the solution for problems that are internal. This is a human flaw the effect of which ,is apparent even in the european crisis.

      The Germans feel they have to burden the crisis ,when their problems haven’t changed ,not the ones that cause them anxiety for years now.
      The same with the Greeks ,with anyone.

      And when you can just transfer the cause elsewhere ,then it is even easier to just avoid looking in the mirror for true introspection.

      For instance ,when you have a bunch of leaders saying that a potential global crisis is a small nation’s fault ,then logic goes on vacation for you and you once more take the chance to find excuses for your own lack of self-esteem.

      Is it different in any other country? Aren’t we all humans?

      I know i am repeating my self ,but ,well ,it’s true ,we are all IDIOTS.

      IDIOTS ,IDIOTS ,IDIOTS ,IDIOTS.

    • Aristoteles: Things aren’t going on well in Germany. That simply isn’t true. Wages have been shrinking for at least 15 years and are quite low nowadays. Many jobs (especially the newly created ones) are part-time and ill-paid. Young people with academic education are often exploited in everlasting and unpaid internships and if they get paid work it is limited to 2 or 3 years. As for the growth: Do you really believe 1.2 percent for the year is true “solid growth” ? The only numbers that have been solidly growing in the last years are that of exports (thus causing part of the problems of the Euro-crisis). If you look at domestic consumption you will see that it hasn’t grown in real terms during the last 20 years. The great German “competitiveness” has been achieved on the backs of the ordinary people. The only thing Except for the German Capitalists there isn’t any reason to feel joy!

  7. Yes, Plassaras – Germany right now is profiting from the distress of the other european nations. That’s bad. But the thing isn’t that easy.
    Germany for the last 15 years followed the (neoliberal) politics whiche the anglosaxon countries began during the 80’s, which meant shrinking real income for nine tenth of the population. And, which seems even more serious, that meant a whole change in culture (once the Rhenanian Capitalism based on social partnership was famous all over the world and a real role model). That change was arranged by German Capital generously financing pressure and propaganda groups (like the Initiative Neue Soziale Marktwirtschaft) brought into life strictly on that behalf, and foundations like Bertelsmann Stiftung, using the most important media, large organizations and other groups for their ends. This campaign, which depicted Germany as a country on the brink in deep need of “reforms”, awaked and forced the most conservative and authoritarian values in society (you know: the whole thing regarding the survival of the fittest, self responibility a.s.o.) and set back progressive and egalitarian values.
    To an electorate, deformed in that way, it would be impossible to sell measures of solidarity with other european Nations, even if any politician wanted to, and although it seems reasonable for Germany itself (i.e. the political and economical elite) . It all reminds a poem of Goethe, the sorcerers apprentice, “Spirits that I’ve cited My commands ignore.”

    • LIKE! Very good comment Hanns. But the problem isn’t just Germany, the EU itself is the problem. How on earth can so different countries and people without any common “glue” believe that they can stick together? No solidarity is part of the problem, no common culture is another part (South vs. North) and not a common race is the third part of the problem. We have Romans in the south and Germans in the north with some Celts and Slavs in between. There is no European identity not that I know of any. The Northerners drink beer while the Mediterranean drink wine and so it goes with almost all aspects of their daily lives. We better say good buy to each other and divorce in peace before we start new wars against each other.

    • Dean

      No ,he researches more than others and that is good.
      They had a change in the perception as we had 40 years ago because of the authoritarian games of the elite. And unfortunately noone can understand this until one has a problem that threatens one’s way of life.

      The problem is that the Northern population fast found a scapegoat (the southerns) and so the elite gained legitimacy again.

      This keeps repeating through out the years and it makes smoke come out of my ears.

      I say ,human beings are stupid. We are. We really are.

    • Great comment Aristoteles! There is nor European demos! The EU looks more like Euroslavia! It is better to return to the Europe of the 1980s!

  8. Please do elaborate further on Merkel’s motivation behind the continued ‘fiscal waterboarding’ of the PIIGS, and Greece in particular.
    Is it nothing more than short-sighted election strategy? Or is it some evil scheme for Germany to forever rule the United states of Europe, like the USA dominates the American continent?
    Or is it a turbocapitalist mindset that happily sacrifices democracy to the markets, dividing us fully into masters and slaves? What the hell is it?
    If this really is full on economic warfare, then knowing the goals of my enemy is essential for my counterstrategies and my family’s survival.
    If this really is a battle between bankster capitalism vs. democracy, then it is Greece’s (historic) obligation to confront the European people with an updated pledge/ manifesto for democracy, STRIPPED of any economic/ technocratic arguments. The EU has to look straight into the mirror and recognize ALL of its totalitarian uglyness!

    • Yes, Kantoos is a respectable blog, and since Kantoos takes good care of what is going on there, quite a few contributors to Yanis’ blog here would not be accepted there. No rascist hatecomments allowed, you know.

    • Better spend less than you earn. Live by your means. A necessity.

    • Huh? And whats wrong with that?Central Banks have to provide the needed reserves all the time in order to allow the banks meet the required ratio.If they dont do so the system cant hit the target rate…so the ECB would still keep providing reserves…i see nothing wrong with that.

  9. Pingback: Yanis Varoufakis on “fiscal water-boarding” and ECB bonds – Kantoos Economics

  10. Pingback: Hinweise des Tages | NachDenkSeiten – Die kritische Website

  11. Since Yanis is now in the US, I found this comment left on a WP article very apro pos because his blog is exhibiting the same signs judging from some low intellect commentary by the usual German suspects whose empty rhetoric correlates perfectly with the nonsense coming out of Berlin.

    “Welcome to the Greatest Depression.

    Another production of the right-wing buffoonery.

    If you really want to know who controls the gop and governs the United States and owns the court system check out:

    http://www.alec.org/
    http://alecwatch.org/
    http://alecexposed.org/
    http://www.thenation.com/article/161973/koch-conne
    http://www.nytimes.com/2012/04/22/us/alec-a-tax-ex
    http://www.washingtonpost.com/politics/legislative-committee-moves-away-from-stand-your-ground-laws/2012/04/17/gIQAN1ytOT_story.html?hpid=z3

    These are the people who own and operate the republican party and other right-wing political organizations, for fun and huge profits at the expense of the American people, the US government and our society as a whole. They have sold us all for 30 pieces of silver plate. Or haven’t you noticed the third-world condition of the US kangaroo kourt system?

    You haven’t lived in a democracy or a republic since early 1981 when Reagan and the neocons began selling the American people down the river, when control of our once free and independent broadcast media was handed over to the people we were warned about controlling the media – the huge mega-corporations. Laws died, were ignored or re-interpreted to appease Reagan cronies. Now you owe your soul to the company store.

    To get some education about the big business, right-wing controlled media, the disinformation disseminated by the propagandists masquerading as journalists and the total lack of honesty, morals or ethics in the right-wing politicos check out:

    http://mediamatters.org/

  12. Dear Yanis,

    all of us, who read your blog regularly and feel, that your proposal makes sense, even to me non experts, we have been able to track the progress of your proposal in the public debate. It was a victorious path. But now, at this point, we do not have time any more.

    So the question is: has Ms.Merkel or her staff heard of your proposal?

    I just have listened to a discussion on German TV with economist Prof. Paraskevopoulos, who was introduced as economic advisor of Tsipras. The man was very reasonable, I was positively impressed. And he spoke fluent German. Sehr gut! If Tsipras really listens to him, I think nobody has to fear syriza. What do you think?

  13. I have a problem with you (very clever) solution to the crisis. Let’s say it works and centuries-old countries invest the ECB with the power to represent them in front of the markets. You still have an overvalued euro. And you still have internal disparities in inflation rates which creates competitiveness distorsions, widening the gap between Germany and the not so competitive countries (which can be countries where inflation is higher because they are one step behind the other in terms of productivity/development – the Balassa effect, or countries where inflation is higher because of higher growth, demography or other. My subpoint is that it is not always a virtue to have low inflation).
    So you will have wiped out the effects of past distorsions, but they will start all over again.
    Debt will accumulate in less competitive countries.
    And you wil have to present another clever scheme for, this time, recycle German trade surpluses into southern European countries (it must probably be more complex than that).
    It could take another decade to do this.
    In this time, you will have accumulated such hatred in every BCE constrained country that the probability of EZ breaking up no matter what is still very high. But the cost of the breaking up will have been largely increased by the higher level of entanglement between member countries that you would be creating with your not so modest proposal if you consider the trade surpluses recycling scheme that you will also have to create.

    • 100% correct. All the shuffling around of debt and/or guarantees does nothing, absolut nothing to resolve the root cause of the problem: Difference of competitiveness without the valve of exchange rates.

      So what is the solution? Internal or external devaluation?

  14. So that we don’t lose focus here:

    The terms imposed on Greece are arbitrary. Let me repeat it: ARBITRARY, ARBITRARY, ARBITRARY.

    Get it?

    Now, to attempt to solve our Greek problem via European consensus of some sort(by definition an impossible task) is the same thing as trying to fly from Athens to Paris via Sydney, Australia (to make it real for Yanis). In other words completely wasteful and utterly unnecessary, not to mention exponentially riskier.

    So, first we allowed some flawed European (aka German) policies to wreck our economy and now we are going to join hands with the butchers of Greece in seeking a solidarity solution?

    I don’t give a rat’s ass what Merkel wants to do or not to do and why she is doing it. Understanding nonsense is not my profession. By definition Europeans can not afford un-charismatic, dim-witted people holding high rank in European affairs. Kick the stupid woman to some German factory in East Prussia and let’s get on with our lives. And forget about the pseudo-solidarity crap. After we(Greek citizens) have fully satisfied our righteous demands according to the law, we will then share what’s left with those other Europeans citizens that have displayed the correct behavior and responses.

    • @ Dean
      Having already accused others of racism, you do it yourself.
      Please behave and try to respect the essence of solidarity and also (new word!) horizontality. Meaning, anyone who wants to be part of a union has to learn to listen, then to talk and also politely to help others see what he is seeing. Not force them or kick them out. Please have the courtesy to DISCUSS and not selfishly slaughter other people’s effort to keep this site’s democratic character. Thank you
      (In case you might bother to answer to me: yes, I am greek, yes I try very hard to live through the crisis, yes I’m very pro european and I like to maintain my naive belief that humanity will eventually learn to live a full and creative life away from chasing money and power.)

    • kat

      You are ofcourse correct ,but it is also democratic to defend/attack when being attacked.

  15. This is a good point!

    Εναντίον της Ελλάδος και του ελληνικού λαού, αυτές τις ημέρες παίζεται το πιο βρώμικο παιχνίδι. Για την ακρίβεια, ο επίλογος ενός καλά προσχεδιασμένου εγκλήματος που ξεκίνησε πριν από πολλά χρόνια και με πρωταγωνιστές τους αρχιδοσίλογους πρωθυπουργούς της χώρας. Μιλώ για τον δόλιο υπερ-δανεισμό της πατρίδας μας και την είσοδο στο ευρώ με πλαστά οικονομικά στοιχεία, σε συνδυασμό με την υπερκοστολόγηση όλων των προϊόντων και υπηρεσιών που πουλούσαν οι ξένοι (με πρώτη τη Γερμανία), στο ελληνικό δημόσιο.
    Όπως οι περισσότεροι έχετε αντιληφθεί το θέμα της παραμονής μας στο περίφημο ευρώ που πέφτει ραγδαία τις τελευταίες ημέρες, είναι ένα πλαστό δίλημμα όσον αφορά την περίφημη σταθερότητα της οικονομίας μας και ειδικότερα την πολυσυζητημένη ανάπτυξη. Μας ζητάνε να ψηφίσουμε, οπωσδήποτε, μία δεξιά-ευρωπαϊκή κυβέρνηση ου θα εφαρμόσει πλήρως το μνημόνιο και θα τηρήσει πλήρως τις δεσμεύσεις που υπέγραψαν Παπανδρέου, Σαμαράς και Βενιζέλος. Δηλαδή, ζητάνε με μαθηματική ακρίβεια να υπάρξει τεράστια ανθρωπιστική κρίση στην Ελλάδα και ταυτόχρονα να λεηλατήσουν τη δημόσια περιουσία και να ξεζουμίσουν ότι έχει απομείνει σ’ αυτή τη χώρα.
    Αντιλαμβάνεται κανείς ότι αυτή η πορεία σε 1 σε 2 ή σε 3 χρόνια θα βγάλει την Ελλάδα εκτός ευρωζώνης, λόγω κοινωνικής έκρηξης και πλήρους αποσύνθεσης του κοινωνικού ιστού. Από την άλλη πλευρά, απειλούν ότι εάν δεν βγάλουμε την κυβέρνηση που ΑΥΤΟΙ θέλουν και εκλέξουμε μία αριστερή κυβέρνηση θα μας πετάξουν έξω από την ευρωζώνη. Δηλαδή, και σε αυτή την περίπτωση, μας απειλούμεθα από το ίδιο τελικό αποτέλεσμα. Εν χρειάζεται να είσαι καχύποπτος για να καταλάβεις, ή να διαισθανθείς ότι εδώ παίζεται ένα χοντρό παιχνίδι σε βάρος των εθνικών συμφερόντων και δεν αποκλείεται να επιδιώκεται η πλήρης οικονομική αποδυνάμωση τα χώρας, ώστε να πέσουμε σε άλλου είδους…. εθνικές περιπέτειες.
    Η ωμή παρέμβαση της Μέρκελ στον Παπούλια, οι δηλώσεις Σόϊμπλε και η επίσκεψη- προειδοποίηση του Μάρτιν Σούλτς στην Αθήνα, είναι μία άνευ προηγουμένου συντονισμένη επέμβαση στα εσωτερικά μίας χώρας-μέλους της Ε.Ε. Μία επέμβαση που καταργεί de facto τα δημοκρατικά και κυριαρχικά δικαιώματα ενός λαού, να αποφασίσει για το μέλλον του. Το περιοδικό Der Spigel, περιγράφει με ανατριχιαστικές λεπτομέρειες όλες τις κινήσεις των γερμανών επισήμων και όχι μόνο, και όλους τους εκβιασμούς που πραγματοποιούνται αυτή την εποχή, προκειμένου να βγει κυβέρνηση, που θα είναι αρεστή, στο Βερολίνο και πρόθυμη να υλοποιήσει περαιτέρω τις σελίδες του Μνημονίου, σφάζοντας οικονομικά ακόμη περισσότερο τους Έλληνες. Πού το πάνε οι Γερμανοί; Αυτό το καυτό ερώτημα, επαναλαμβάνω, πρέπει να προβληματίσει όλους μας και κυρίως την πολιτική ηγεσία του τόπου.
    Όπως έμαθα η Μπακογιάννη, δεν έχει κλείσει ακόμη συμφωνία με τον Σαμαρά, ο οποίος της ζητά επιτακτικά να διαλύσει το κόμμα της. Ενδέχεται μάλιστα να μην επιτευχθεί συμφωνία, διότι τόσο η Ντόρα, όσο και τα στελέχη της, εάν δεν πάρουν αυτά που ζητάνε, δεν πρόκειται να προσχωρήσουν σε αυτό το περίφημο…. ευρωπαϊκό μέτωπο, το οποίο μετά τις προσχωρήσεις των στελεχών του ΛΑΟΣ, χαρακτηρίζεται από πολλούς ως «εθνικιστικό-ακροδεξιό μέτωπο».
    Μεταξύ μας, θα έχει μεγάλη πλάκα το ντιμπέιτ Σαμαρά-Τσίπρα. Ένα μήνα πριν, ο Σαμαράς δεν ήθελε κανένα ντιμπέιτ και τώρα θέλει. Νομίζω ότι δεν είναι καθόλου καλή η σκέψη…..

    ( Γιώργος Τράγκας )

  16. “In any case, these costs [of exiting the Euro] have to be compared with the enormous benefits of exiting the system, consisting in the possible implosion of the Eurosystem. Exiting the euro implies ending being part of an inflationary, self-destructing monetary system with growing welfare states, falling competitiveness, bailouts, subsidies, transfers, moral hazard, conflicts between nations, centralization, and in general a loss of liberty.”

    “Is There No Escape from the Euro? Mises Daily: Monday, April 23, 2012 by Philipp Bagus ”

    http://mises.org/daily/6009/Is-There-No-Escape-from-the-Euro

  17. One of the ways this whole thing can be described is this surreal joke

    The plane is ready to take off. All passenfers are aboard, only the pilots haven’t arrived.

    Suddenly two men in pilots’ suits board wearing black sunglasses and having blindmans’ walking sticks in their hands.

    Eventually, using the walking stick they find their way into the pilot’s cabin.

    The passengers cannot believe their eyes but before they can react the plane is at the beginning of the landing strip with engines working at full power.

    The plane rushes ahead with evergrowing speed but doesn’t take off. Those sitting near the windows can see the end of the runway coming dangerously near. The first scream of terror is followed in clusters of second by everybody in the plane. And then at the edge of the runnway the palne takes off…

    Minutes after, somewhere at 6000 ft the autopilot takes over. The first pilot sighs and tells the other:

    -I’m very worried about this proccess. I think someday we are going to crash…

    -Why is that?, the other pilot says

    -Because they are constantly sreaming latter and latter in the proccess…

    • “Instead, they want a return to the debt-fueled prosperity that they have always enjoyed in the past.”

      Really? Is that what we are really saying?
      Because what i think we are saying is this: Your government shouldn’t force illegal loans and corrupted deals for imports and artificial standards of leaving in any country and other governments shouldn’t accept.
      So ,not only you grew your economy at the expense of others ,now you say it is not logical to pay for the problems caused. Stop crying and pay up. Not the people ,but your government.

      “It is shameful for the rest of Europe to be pleading and begging Germany to help them.”

      Oh ,please. Cut the crap. The whole country of yours should go to jail on a far away planet.

  18. Is there any chance for the crisis-stricken Eurozone periphery countries along with France to have any bargaining/negotiating power against Germany and its satellites as to exert pressure towards a drastic change of the policy to combat eurozone crisis?

  19. Yanis, there are now at least four proposals to address this dilemma of both the ‘North’s’ fear (transfers) and the ‘South’s’ sufferings (too high interest) as well as a unified answer to the distrust of markets.

    (1) Your ‘modest proposal’
    (2) Brunnermeier’s ‘EsBies’ – http://euro-nomics.com/esbies/
    (3) the Council of econ. experts’ ‘pool of excess debts’ – http://www.europarl.europa.eu/pdfs/news/expert/infopress/20111130IPR32785/20111130IPR32785_en.pdf
    (4) Bruegel’s ‘blue bonds’ – http://www.bruegel.org/publications/publication-detail/publication/403-the-blue-bond-proposal/
    One could also include P de Grauwe’s proposal to use different country-specific fees for t blue bond issue. – http://www.ceps.be/book/governance-fragile-eurozone

    I know these proposals differ in details. I know their authors differ in their political outlook. Yet I wonder if there is not enough common ground for you guys to issue a joint statement to put pressure on the politicians to break the deadlock you describe in the second part of the blog. Just thinking…

  20. Yani:

    Say, that under your proposal the Greek sovereign debt is categorized as follows:

    60% as the Maastricht compliant part bearing interest I-m = ?
    and the balance of the Greek debt bearing interest I-nm = 2-3.5% (based on already achieved PSI rates).

    In such case, since the Greek sovereign debt is roughly 120% of GDP, it means that roughly half of the Greek debt will receive a new interest rate I-m(Interest Maastricht %), while the other half would remain at the already known I-nm(Interest NonMaastricht%) in the 2-3.5% range.

    Do you then expect that the new I-m% will be lower than the 2-3.5% range?

    What I am trying to get at is this point:

    We have been arguing successfully (I think) that in Greece’s case the size of present debt is not serviceable. So, unless the new I-m% is effectively close to zero so that the weighted average of the new rate for the total Greek debt is below 2%, then what’s Greece’s benefit from Policy 2 of your revised Modest Proposal?

    I understand the benefit of your proposal for Spain, Italy and all others but for Greece (unless we receive a 3rd FSI (Formal Sector Involvement) haircut) the results are marginal. It might produce a slight debt relief or in the worst case Greece’s present rate is already superior (lower) than the Maastrich compliant rate (in which case there is no additional debt service relief for Greece)

    Do you care to clarify what would the Greek benefits are?

    • If the ModPro was designed with “solving” Greece’s problem then it wouldn’t be worth implementing.

    • Obviously the MP is meant to help Europe as a whole and not just Greece and imho thats a plus for the whole project.Surely Greece would still have a bigger problem in terms of debt than Spain and Italy but you have to see the whole picture.The MP is not just about debt.Or to be precise,it adresses the debt problem both directly and indirectly.The direct way is obviously the involvement of the ECB as the MP proposes.

      The indirect way is through the investment policy that the MP proposes.Increased investment funds can allow the gvt to deleverage without hurting the prvt sector and it would also promote growth which would make the debt more sustainable.

    • Yanis (like Munchau and Krugman) beleives that a defeault of the insolvent states is inevitable to happen sooner or later. If I have understood well, the purpose of the Modest Proposal’s ECB-bonds is to be used as a vehicle for raising idle funds from all over the world (including Europe itself), so that the future financing of the Eurozone’s member states can be served in a way that the forthcoming defeaults and restructurings can happen without causing the break of the Eurozone, the collapse of the European Union and enentually the death of the european ideal. It’s the lacking “cushion” (shock absorber) or the real “firewall”, which should replace the current Troika’s bailout loans, that just transfer the problem from the private sector (banks) to the “formal” – “official” – i.e. public sector (states), through toxic CDO’s like mechanisms (EFSF, ESM, etc). And it should not be overlooked that the Modest Proposal’s ECB-bonds are just a part of a broader New Deal for Europe, along with the unification of the european banking system and a paneuropean investment project, as oposed to the irrational austerity being imposed all over Europe.
      Although I “feel” (I’m archaiologist not economist) that the Modest Proposal is at least reasonable, it’s rather impossible to be accepted by the short sighted european policymakers. Even here, in desperate Greece, nobody has bothered just to discuss it. Of course, this doesn’t mean that Yanis should stop making his efforts.

      P.S.
      It’s nice to have you back again Dean.

    • Let me try a blanket reply:

      1. If the MP does not solve Greece’s problem then it’s not worth the paper it’s written on.

      2. I am fully aware of what the MP entails but absent adoptation @ a European level its utility is next to zero.

      3. Greece is not a lab mouse engaged in an experiment of finding her death tolerance. Either you restore Greece to health or quite frankly for those not caring about this part you can go straight to hell. This is a justice and fairness issue and it’s not negotiable.

      4. At this stage Europe does not deserve a solution. It only deserves utter destruction and rebuilding from scratch.

      5. The biggest loser will not be Greece when all dust settles. Greece will come out of this smelling like a rose.

    • @Dean

      1)I remember you were trying to make a strategic choice for the elections,based on the conditions etc and no emotions etc and now you act as if theres a better alternative to choose at the current conditions.Well if there is one,shoot it !

      2)That comes in conflict with your #1.MP is the closest you get to a solution that could at some point get accepted in Europe.If this doesnt happen, you really expect anything even more radical to be adopted?

      3)Can this happen without Europe?If yes, im all ears.Again i see your strategic thingking has left us for good.

      4)So you seriously expect Europe to go down the drain (even if it deserves that) and Greece will survive at the same time?

      5)I definitely hope so and i always try to remain positive but without facts thats just wishful thinking.

      Im not trying to be a know-it-all ass here,but in case you havent realised MP is designed in such way so as to avoid political burdens from our Austrian school politicians.This means its not as effective as it could be if there was more freedom for choices.
      I know at least one way to make all this pain go away: Quit thinking about the euro as a gold-standard regime and treat it as a true free floating fiat currency.Thats way better than the MP.But im afraid MP has way more chances to be adopted, hands down.

    • Crossover:

      Cool your jets! I have nothing against the MP and I hope it’s adopted.

      My comments were mainly directed to estrangeiro, whose uninformed comment would normally make me crack his skull with a 2X4. Instead, a gave him a terse reply as a reminder that if any proposal can not cure the main manifestation of the problem in Greece (which Greece looks disproportionately effected by it), then such proposal is worthless.

      This is another way of saying that if you think that you can forget the victim in the cellar and engage in a nice stroll wearing your European hat, then you better forget it. Ethics and morality demand retribution for Greece first. Europe can wait. First Greece, then Europe. Not the other way around and not on my watch.

  21. The way you put it it makes sense that such eurobonds wouldnt work.But on the other hand,you yourself had previously stated (and it is true) that the whole EU debt/gdp ratio is at a level low enough to allow for reasonable rates.

  22. “Such a loss of its ‘exit card’ (that only Germany truly owns) will reduce the German chancellor’s bargaining power, within the eurozone, inordinately.”

    Yani,

    Why do you say that just Germany has this exit card???

    Can you elaborate a bit further what you mean!

  23. Boiled down, you’re dictating a *false* choice to the Master’s slave.

    Master: “Either endure the torture I impose on you, Slave, or join me the Master”
    Slave: “Why need I choose between your options when I can be my own Master, or choose slavery to another Master who never tortured me?”

    I tried explaining this to JRickards, another genius who however is still unconvinced:

    In a ClosedCircuit world – that scenario will almost always benefit the torturing Master,
    But in an OpenCircuit world – the slave simply liberates himself or signals to a less cruel Master

    Like Gideon Rachman said in the FT yesterday

    “Better an end with horror, than a horror without end”

  24. Yanis, I think I have commented this before. If yes, sorry for the repetition. I grant you that having a joint and several guarantee from member states is more of a legal commitment than just having member states obligated to replenish ECB capital but at the end of the day it comes to the same. Put differently, every buyer of ECB bonds will ultimately consider the backing of the ECB shareholders and the risk that they might not honor their commitment to the ECB (implied support).

    All these complicated excercises have one objective: lower the interest expense for borrowing countries. There is a lot easier way to accomplish that, namely – just lower the rate! I guess about 2/3 of Greece’s sovereign debt is now in official hands. So, within a brief telecon the officials could agree to lower the interest rate to their own borrowing cost (if there were the political will).

    I fail to understand why the most common way to reduce interest expense for sovereigns in trouble has not been discussed at all. That is to split the interest rate into “cash interest” and “capitalized interest”. All that matters for the budget is the cash interest and that should be kept as low as possible (I would suggest a variable rate and cap it at a certain percentage of government expenditures). The rest of the interest rate should be capitalized at least for some years or, preferably, until doomsday. It doesn’t really matter at this stage for the following reason.

    Today, the existing Greek debt trades between 10-20% of nominal (I believe). The creditors should have one primary interest, namely that whatever is done helps to bring that debt back to perhaps 50% of nominal (or even more) over the course of the next couple of decades. Whatever it takes to accomplish that should be in everybody’s interest. If it takes more new loans in a senior position to existing debt, fine. If it takes Alexis Tsipras, fine. What makes no sense at all is to make new loans so that existing debt trades perhaps at zero afterwards.

    • eurobonds are NOT designed to save Greece and with only Greece in mind.
      Greece will benefit indirectly in the short term and equally as other members in the long term.

    • “All these complicated excercises have one objective: lower the interest expense for borrowing countries. There is a lot easier way to accomplish that, namely – just lower the rate!”

      Even easier: Just borrow less and live by your means!

    • n eu d

      Just steal less and live by your means.
      Your government’s money is the south countries money.

  25. Greece will leave 21/12/2012.

    The world will crush. Then Maya aliens will come and change the polarity of the Earth and the human nature. Then we eat ice-cream with oyzo flavour ,we have a party and choose mates.

    Then we will start using that new currency called Geuro.
    One pita Geuro with everything please. Wait ,no. Keep the rotten onions (“leaders”).

    Anyone else has a better scenario?

  26. I agree with your main point (eurobonds must be guaranteed by the ECB or some proxy) but on a technicality: it’s not that obvious to me that jointly guaranteed bonds would trade at the weighted average rate. Markets are not that mathematically precise. I’d expect a rate lower than that somewhere midway between the weighted average and the bund rate, at least for now, and higher is not unthinkable either depending on how things are set up and evolve. Also the Merkel mind-reading sounds a bit too esoteric. Will you eat your hat if she changes her mind?

  27. Also your scheme, like w/o exception every proposal for cleverly disguised eurobonds, means that at the end of the day, it would be German taxpayers who are on the hook for further follies of the GIPSIFs since Germany funds 27% of the EFSF, the ESM and the ECB.

    BTW, also your scheme would be stopped by the German Constitutional Court. It has already ruled:

    “Es dürfen keine dauerhaften völkervertragsrechtlichen Mechanismen begründet werden, die auf eine Haftungsübernahme für Willensentscheidungen anderer Staaten hinauslaufen, vor allem wenn sie mit schwer kalkulierbaren Folgewirkungen verbunden sind”

    which translates to:

    “There may not any permanent international juridical mechanisms be established which amount to a guarantee to cover the decisions of other nations, especially if they are associated with unpredictable consequences”

    Plus

    “Jede ausgabenwirksame solidarische Hilfsmaßnahme des Bundes größeren Umfangs im internationalen oder unionalen Bereich muss vom Bundestag im Einzelnen bewilligt werden”

    which translates to

    “Each cost effective act of solidarity in large-scale international or european area must be approved by the Bundestag in detail”

    Each of this sentences deem your porposal, or any other form of eurobonds, as against the German constitution.

    And be assured that any political party who attempts to change the constitution in this respect, would be thrown out of power immediately and forever.

    As for your ridiculous conspiracy theory about Germany and Merkel, I hope this was just a result of to much Ouzo.

    • I am afraid you are precisely wrong. Just like the issue of EIB bonds (which have been issued for decades) ECB bonds will neither leave German taxpayers on the hook nor violate the German constitution. The conversion scheme we propose has nothing to do with solidarity. Once the ESM was set up (and passed the German Constitutional Court test), its insurance services to the ECB-administered conversion scheme simply ensure that no fiscal transfers or solidarity will ever be necessary.

      My hunch is that you just do not want Germany to stay in the euro. This is a respectable position. You do not need to sully it by arguing against the Modest Proposal’s economic or legal credentials

    • Actually the constitutional court has also ruled that Germany must leave the Euro, if the monetary union does not operate under the agreed principles!

    • No EU D
      That doesnt mean nothing.If the rules said that all eurozone members should bomb themselves with nukes and they didnt do it,the constitutional courts would say that its illegal to stay…like whatever….WE make the rules and WE change them….the rules exist to serve us not the opposite.

    • If Germans are actually so stupid as to let their constitutional court ruin their economy, then this gives a strong clue as to why they should have no role in the management of the EU. I would say the same if the Greek constitutional court were allowed to have any say on political decisions about the position of Greece in Europe. There is a specific function of courts — which is to uphold the rule of law. Nothing else.

    • The worst case scenario is to move from the current status to be more like Switzerland. That is really a terrible outlook!

    • Crossover the GErman constitution exits to serve the Germans. Period ful stop, other countries in Europe are not mentioned.

    • @No EU D

      Did i say they exist to serve me?Im merely saying that it doesnt mean anything…If they believe its in the better interests of Germany to have eurobonds they will change the law…so simple.Courts only exist to make sure laws are followed…they cant stop the gvt from changing them…

    • Crossover, this part the government cannot change. You need to make a new (real) consitution for that. This is only possible with a referendum.

    • Thats another thing No EU D.
      We might disagree on the eurobonds but seriously,if they feel eurobonds must come into existance they will find ways to either change the law or overpass it.

      In Greece,we needed a strong majority of 180 votes in order to allow the memorandum to pass,yet it passed with a simple majority.

      Im not saying this,because im pro-eurobonds.Im just saying thats the last thing to worry about if one wants to implement them.

  28. I suppose you have seen the following from today’s Eurointelligence news briefing:

    A disturbing snippet from the summit was a statement by Angela Merkel, as reported by Frankfurter Allgemeine, in her argument against eurobonds. She said that the problem with eurobonds were low interest rates, which in the past had led to bubbles and other distortions. (One of the principal attractions for eurobonds is to reduce the extremely high borrowing costs of the periphery. It is one thing for Merkel to object to eurobonds on political and legal grounds, it is quite another to insists that interest rates in these country should remain high.)

    Fiscal waterboarding, indeed.

    There is little else to be said in this context. You have made a brave attempt with your Modest Proposal but there was never a chance of a “solution” to the “problem”.

    • “it is quite another to insists that interest rates in these country should remain high”

      Exactly it is like protecting someone from himself. High interest rates mean less debt. The GIIPS had quasi Eurobonds the last 10 years. We all know the result.

    • Pedro:

      Nice argument from the free loaders of Europe (hmmm I mean Germans) who today issued debt with zero coupon. Free money for the morons of Europe and suffering for all the rest.

      How can you possible make such arguments? Who do you think you people are? We can run circles around you on any given subject and you are here to give us “advice”?

    • “who today issued debt with zero coupon”

      That is the reward for good housekeeping and a decade of austerity (both relatie the tohers)! Jealous?

    • TIme to RuMbLLLLLLLLe

      (or battle for rable of time for eurozone)

    • “That is the reward for good housekeeping and a decade of austerity”

      Amazing. What kind of slave are you?
      Your gov. cheated other countries ,they decided austerity for you while they got all the money ,they now steal more and you defend them?

      Well ,as i said. The whole country of yours………

      And we had austerity two times already from 1980. I guess i know now where all our money went. To the hypocrites.

    • Pedro: Napoleon described the British (disparagingly, but not inaccurately) as “a nation of shopkeepers”. I guess you would like us to refer to Germany as “a nation of housekeepers”. This idea of good housekeeping was first enunciated by Thatcher, at the time she was destroying the UK manufacturing sector with an economic policy based on monetarist dogma. The very high pound made the UK reliant on banking and insurance, as opposed to actually doing anything useful. Now look at the mess — and they are not even in the eurozone.

      So, we have a modern history of where good housekeeping leads. Pity that you don’t know any economic history, or you wouldn’t spout such rubbish.

    • OK, so all of you suggesting that the track record of Greece is better than that of Germany or the UK? Or did I miss something?

    • @No EU d:

      yes, you missed something. The adage is “People who live in glass houses shouldn’t throw stones”.

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