The Modest Proposal for Overcoming the Euro Crisis, Version 2.2

Only a few days’ worth of developments made it necessary to update, yet again, the Modest Proposal. The new text we are putting out today is  quite different from Version 2.1. So much so that we toyed with the idea of labelling it Version 3.0. But we shall keep that label in abeyance for later. In short, the new Version 2.2 contains a great deal of fresh supporting arguments but also, and this is important policy-wise, an amendment regarding the policy for dealing with the banking crisis (Policy 2). We are expecting your comments with  great anticipation. So, here it is:

Α Modest Proposal for Resolving the Euro Crisis, Version 2.2

18 thoughts on “The Modest Proposal for Overcoming the Euro Crisis, Version 2.2

  1. Yanis,

    There is one point where I disagree strongly. Whatever Stark, Weber, Wiedmann and now Wulff may say, secondary market purchases of sovereign bonds are not illegal.

    Article 123 of the EU treaty say “the purchase directly from them by the European Central Bank or national central banks of debt instruments [shall be prohibited]”, where the word “directly” is there for a reason. If you prevent the central bank from carrying out open-market operations on any asset class, what kind of a central bank is that?

    So I disagree with your concession in The Modest Proposal that “The relevant Treaties from Maastricht to Lisbon do not allow: i. The purchase of member-state bonds by the ECB, which effectively rules out the financing of members states from the ‘centre’.” and also by saying “both provisions i and ii above have been disregarded as a result of the crisis. The ECB has been forced to purchase bonds (albeit in the secondary markets),”

    This is a serious mistake, especially a political mistake. It cannot be conceded to these ignorant so-called economists that what the ECB has done so far is illegal.

    Let’s not forget that the EU treaties don’t forbid the primary or secondary market purchase of private sector toxic waste. And that Weber convinced the ECB to buy 60 billion Euros of Pfandbriefe in 2009 only to scream bloody murder (and lie about the legality in public, undermining ECB collegiality, too) when a similar amount of sovereign debt was purchased in 2010.

    • I do not disagree with you (and our ref in the ModProp was about the ban on purchasing bonds in the primary market). But I strongly believe that this debate is irrelevant, given the current state of the euro crisis….

    • Needless to say that I agree with migeruet, on everything he says so eloquently.

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  7. Dear Yanis,

    Very intriguing proposals, but I think your proposal has a few challenges:

    – The proposal seems to completely ignore the reforms necessary in countries like Greece. Even if you would transfer Greece’s entire debt to the ECB’s balance sheet, you still need measures that make sure that Greece doesn’t need to be bailed out again. In other words, Greece needs to cut its budget, implement reforms, etc. etc. So, also in your proposal austerity is inevitable. The proposal mentions only one almost hidden reference to this: it says “For such a member state as Greece, whose remaining national debt exceeds 60% of GDP, the transfer should be conditional on an agreed schedule for its reduction.” (=austerity!)
    – The ECB already now is heavily criticised [I know, I work there…] for having bought Greek bonds and you think they could get away with what you call a “tranche transfer” of 90% of Greek debt (150-60)? I’m sure many will call this a ‘transfer union’even if you say that it isn’t. Personally, I sympathise with this part of the plan, but I don’t think it will fly politically and that it could be done without a Treaty change.
    – A comment that does not so much refer to the proposal but to something that I heard you say on Dutch TV tonight (and a couple of weeks ago). You basically said that further transfers to Greece should be stopped immediately because it is only used to pay back banks. This is not correct. The money is also used to pay (state) pensions and wages. And if Europe/IMF would do what you say, will you then explain to Greek civil servants and pensioners that they will not get paid? Even your proposal would take some time and discussion to implement, so you would at least need to acknowledge that you cannot cut off all payments to Greece from one day to the other. And it would also have a major impact on the EA financial system. In short, what your proposal misses, is a transition solution. Going on Dutch TV and saying that they should simply stop lending to Greece immediately, is suggesting that there are simple solutions. And there are no simple solutions.

    Kind regards,

    William

    • Dear William, Three points: (a) We have not ignored at all the question of what to do to avoid a repetition of the problem if and when the debt-recession crisis subsides. This is the whole purpose of Policy 3 and our suggestion that investment policy is passed on to the EIB. Personally I do not trust the Greek state with the task of investing for growth. But I do trust the EIB. Moreover, while in agreement with you that the state is in dire need of crucial reforms, the argument that the crisis must be allowed to spin further out of control as an incentive to Greeks to pull their socks up is ludicrous. It is tantamount to saying that you do not pull a drowining, weak swimmer out of the water before you have guarantees that he will train harder and swim more sensibly. While drowning the swimmer cannot improve his skills. First he needs to be saved. That he must then be given instruction, is another matter. (b) Those of us who criticised the Greek bailout of May 2010 also said, at the time, that the ECB’s bond purchases would not succeed. It is weird to see that our critics use the failure of those purchases as an argument agaisnt our proposals (which explicitly and forcefully argued against debt buy-backs of any shape or form). And, lastly, (c) yes, I stand by my statement on Dutch tv. Put simply, if you are bankrupt you do not borrow more at high interest rates. Period. Such new loans are like petrol on fire. If Europe wants to help itself avoid a Greek default, it will have to adopt something like out Modest Proposal that involves no such loans, If not, Greece will have to deault and we Greeks must live within our means. Which means a cessation of payments to creditors, a 90% reduction in armaments (including orders of frigaes and submarines from Germany and Holland) and large paycuts for senior civil servants (like myself). It is that simple.

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    • Should your swimmer choose to procrastinate the practicalities of distance and depth, refusing to exercise his true worth, perhaps he should drown?

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