Roger Strassburg and Jens Berger, of NachDenkSeiten, interviewed me on the Modest Proposal to Resolve the Euro Crisis and the Eurozone Conference that James K. Galbraith and I organised in Austin in November 2013. Here is Part A of the interview (Part B, which is centred upon Greece, will be posted tomorrow). (Click here for the interview in German, as published in NachDenkSeiten.)
RS: I wanted to ask you about the conference you and James Galbraith held last November, where you re-presented your Modest Proposal, which I’d also like to ask you about. But maybe you could tell us a bit about the conference first, if any conclusions were reached.
YV: The conference, as you probably heard, was a sequel. We had a similar conference two years ago, in November 2011. This one was essentially taking stock, asking what has happened over the last two years, and on whether the rumors about an impending end to the eurozone crisis are accurate, or is whether the eurozone crisis proceeding at an alarming pace. So it would be absurd if the conference as a whole came up with a unitary conclusion. It wouldn’t have been a decent conference. The whole point of conferences is to bring different perspectives to bear upon the proceedings.
So we had, as I’m sure that Jamie has told you, we had the Deputy Secretary General of the OECD Yves Leterme, former Belgian Prime Minister, and as you can imagine, representing one of the large bodies of economic governance internationally, expressing the more ‘official’ view (which was, naturally, a nuanced view; e.g. “the crisis has subsided, but it hasn’t gone away, and there is a lot more to be done”), you can imagine what he said. But beyond that, what was interesting about Yves Leterme’s presentation is that he went off the beaten track of the script that usually officials present, and he delivered a fascinating personal account of the heady days of May 2010, as Greece was collapsing, before the crisis spread to Ireland, Portugal etc. Back then he was Prime Minister of Belgium. While he did not really tell us anything we had not already suspected, it was really interesting to hear from the horse’s mouth, so to speak, about the complete and utter panic that had gripped European leaders during that period, putting them into the position of having to make decisions completely off-the-cuff without much preparation, which to some extent explains the comedy of errors that we have been observing over the last four years. In addition, we had representatives of the point of view that the eurozone is best dismantled because the political will of fixing it is simply absent. Heiner Flassbeck put forward that position. Then we had the former finance minister from Portugal, who was effectively arguing for a continuation of present policies, despite their problems, that according to him they seem to be working.
Then there was our position, the position that Stuart Holland, Jamie Galbraith and I are putting forward (we call it The Modest Proposal for the Resolution of the Euro Crisis), that the present path on which the eurozone finds itself is inexorably leading to a disintegration of the eurozone part of the European Union, but that nevertheless there are things we can do to prevent that; steps that do not involve federal moves. Our position on this matter, as you probably know, is that, the way the crisis is unfolding, some form of federation (e.g. the creation, let’s say, of a Euro Treasury, a Federal Treasury or sorts) is becoming less and less desirable for both the surplus and the deficit countries within Europe. However our point is that it is really not necessary. You don’t need to move in the direction of federation in order to provide the eurozone with the institutions and institutional interventions that are essential in order to avert the process of disintegration. We already have the institutions. The point is to redeploy them in a sensible manner. That was, in short, the range of opinions that found a platform at our Austin Eurozone Conference. It was a highly exciting conference, I have to say.
JB: You wrote the Modest Proposal with Stuart Holland and Jamie Galbraith. I like this Modest Proposal because you offer realistic solutions for the euro crisis. Could you please tell our readers some basics about your Modest Proposal. I think only some of them know what you’re writing.
YV: What makes this proposal modest is that it does not seek to fix the problems of the eurozone by creating brand-new, difficult to agree upon, institutions. It does not require a change in the Treaties, and it does not require of the surplus countries like Germany or Holland or Austria to guarantee the debts of the deficit countries. The way that it is proposing to resolve the Euro Crisis is by redeploying existing institutions in a manner that does not fall foul of existing Treaties. We have identified four realms in which the crisis is unfolding, evolving, developing. These four realms are: (a) the banking crisis, (b) public debt, (c) a Eurozone-wide, long-term short-fall of productive, and (d) the humanitarian crisis that is due to four years of dithering (the sharp increase in poverty, even hunger, in some of the deficit countries). Once we identified those four realms, we decided to propose that these problems are, in a sense, Europeanized without federation, without further loss of national sovereignty, and without joint guarantees of liabilities (which is something that, for instance, the Berlin government doesn’t want to hear about).
Let’s take them one by one.
Let’s begin with the banking crisis. We all know that we can no longer allow the death-embrace between insolvent banks and insolvent states to continue for much longer. We need to break up that deadly embrace between the insolvent banks and the insolvent state. European leaders seemed to realize that in June 2012, when Mario Monti (the then Italian Prime Minister) forced the matter on the agenda. So, everyone agrees that the solution must involve a banking union. The problem was, however, that after the banking union was decided, in principle, Germany immediately began to rip it apart. Mr. Schäuble was at the helm of the banking union’s preemptive dismantling. In August of 2012, in the article in the Financial Times, he stated clearly that you can’t really have 6,000 banks being supervised by the ECB and raised the question of the joint liability of their losses, stressing that the German taxpayers foot the bill for the black holes of the Spanish and Italian banks. To cut a long and sad story short, almost two years later the EU has agreed upon a banking union that is no such thing. That, to quote Shakespeare, it is confirmed in the breach rather than in the observance.
The problem is that the best is always the worst enemy of the good. European leaders want to say that they have formed a universal, pan-European banking union, when in reality they have achieved no such thing (e.g. there will be no common deposit insurance scheme and the deposits of bank customers will certainly not be equally safe in all Eurozone member-states). Behind all this lurks Berlin’s worry that a proper banking union will bring to the surface the true size of the black holes in the Periphery’s banks.
So let’s agree that we cannot press a button and have a proper banking union today. Allow me to argue that not only we cannot do it but perhaps we do not need to do it immediately.
Nevertheless, as we speak, as you and I are talking now, the Greek banks and the Spanish banks are being recapitalized by the German, French and Dutch taxpayer through the European Stability Mechanism loans that go to the Greek government, the Spanish government, the Portuguese government, etc. and those loans are then passed on as capital to the Greek, Spanish, Portuguese, the Irish banks.
Now, the problem with that is, that because these loans are added to the national debt of Greece, Spain and Portugal, these governments fall deeper into their own debt holes. So these states become even more insolvent than they were before. Everybody knows that, so who wants to invest in a country whose state is becoming even more insolvent? Therefore the dearth of investment in Greece, Portugal etc. means that these economies grow very little, if at all, while their public debt rises. The economy being in a mire, while the states are recognized to be beyond salvations, means that the banks will not be able to recover, so they face more non-performing loans.
So effectively the money that the Northern European taxpayers are guaranteeing on behalf of the Periphery’s governments to give to the Periphery’s banks is effectively wasted. And the only people who benefit from that are the bankrupt bankers who remain in control of zombie banks. So that is a major waste of German taxpayer money, or European taxpayer money.
What we are saying is very, very simple: Forget about the the grand project of a comprehensive banking union, where all the banks are part of a banking sector supervised by the ECB. Let’s do something else.
Every time a bank in Europe needs to be recapitalized with public funds, with ESM funds, it should drop out of the national jurisdiction (with the consent of the national Parliament), and it should be supervised directly by the ECB. Its board of directors ought to be replaced by appointees from the ECB, the money should go directly from the ESM to the bank under the supervision of the ECB the new board of directors should see to it that the banks are made healthy again so that their shares (held directly by the ESM which has recapitalized them) can be sold and the ESM can get its money back with interest. That way, the money that goes to each bank does not count as part of the national debt of the country in which that bank is domiciled, so you break down that death-embrace between that insolvent bank and the insolvent state. And at the same time, the European taxpayer knows exactly where his or her money has gone and who is supervising it. Moreover, in this manner we will have succeeded in breaking down the cozy, the toxic, relationship between corrupt national politicians and corrupt ‘national’ bankers.
In effect, the ESM will have become the European equivalent of America’s Troubled Assets Relief Program (TARP), with the european taxpayer getting his or her money back from the sale of these banks back to the private sector (as American taxpayers did once TARP had done its work). So that’s the banking problem solved.
JB: Can I ask you a short question? Does the ECB have the manpower to supervise the banks?
YV: Yes, absolutely, because, you remember, this is a step-by-step thing. So I’m not asking that the ECB supervises six thousand banks. How many banks are now being recapitalized by the ESM? Six in Greece, eight in Spain and two or three in Ireland. We’re only suggesting that those banks be supervised by the ECB. The ECB does have the manpower to supervise those few banks, not 150 huge banks, not 6,000 banks. So the ECB effectively gets an opportunity to build up the manpower and the expertise that it has in supervising these banks very slowly, because it will only have to do it for the banks that get money from the ESM. Much, much later, it can then think of a single supervisor for all Eurozone banks. Does this answer you question?
YV: So let’s move now to the question of the existing public debt.
Our suggestion is very, very simple. Forget Eurobonds that are jointly guaranteed by Greece and by Germany, because if we had Eurobonds of that nature, if they are guaranteed by a strong state and a weak state, naturally the interest rates of these bonds would be somewhere between the interest rate of the weak state and the strong state, somewhere between Greek and German interest rates. That interest rate would be too high for Germany and not low enough for Portugal or Greece, so it would be a disaster. We don’t want that.
RS: I would think they’d be somewhere more or less the same as for the stronger states, because it’s guaranteed by the stronger state.
YV: It would be a skewed, a weighted average, if they are jointly and severally guaranteed state bonds, and so you are right: the interest rates would be closer to Germany’s than to Greece’s. Still, they would be too high for Germany and not low enogh for Greece.
Look, Germany is a successful economy, but it’s not large enough to guarantee the debt of the whole of the Eurozone. Nor should it. If Germany had to guarantee those Eurobonds eurozone-wide, then its own solvency would be in question, its own yields would go up, and certainly the Eurobond would be seen as an undesirable, inefficient compromise. This is the reason why Mrs. Merkel and Mr. Schäuble, I think quite understandably, reject the notion of jointly and severally guaranteed Eurobonds. They would be the equivalent of having the state of Nevada and the state of New York jointly guaranteeing U.S. Treasury bonds. It would really be stupid. We just wouldn’t want that.
RS: They wouldn’t want the “several” part.
YV: Yes, the “several” part, indeed.
Anyway, so what we are suggesting is this: The European Central Bank makes an announcement, Monday morning, and the announcement is as follows: From today, every time a bond of any Eurozone country matures, that member state will have the right to request that it participate in the ECB’s, what we call, “Limited Debt Conversion Program”.
Suppose for example that an Italian government bond matures. Italy has a 120% debt-to-GDP ratio. The permitted level is 60%, as we know from Maastricht. So in the case of Italy, it has twice as much debt as it was allowed to have by Maastricht. So what we can do, is we can separate the debt of every member state into the Maastricht-compliant part and the rest – the good debt and the bad debt, if you want. And the ECB undertakes to service the good part of the debt, the part of the debt that the member state was allowed to have – we call it the Maastricht Compliant Debt (MCD). So in the case of Italy 50% of every maturing bond will be serviced by the ECB. Not purchased, but serviced. That means that the the ECB pays the bondholder 50% of the maturing bond so as to help ‘extinguish’ it.
But before anybody starts saying, well this is not permitted because the ECB is not allowed to monetize debt, our proposal is not that it monetizes it; it is not that it prints the money and pays for the debt. Our proposal is that what the ECB does, is that it acts as a go-between the money markets, investors and Italy. And the way that it will do that, according to our scheme, is that the ECB will issue its own bonds on behalf of Italy to service the 50%, the MCD of the maturing bond. So, let’s say that it issues a ten-year ECB bond in order to do that. Simultaneously, it opens a debit account for Italy within the ECB, while Italy commits to make regular payments to that account over the next ten years’ time, when the ECB bond needs to be redeemed. So, it will be Italy that will have paid the bond back.
What is the benefit for Italy from doing that? The benefit comes from the fact that the ECB has much, much greater credit-worthiness, and the ECB bonds would have much, much, much lower yields, far less than 2%, even less than Germany’s, compared to Italy’s. And if you do this for the good debt only, for the MDC only, but for every eurozone member state that wants to participate in this, we’re talking about a total reduction in the mountain of the Eurozone debt for the next twenty years of between 30 and 35%. Effectively the European debt crisis goes away.
Now the question is, why will the ECB bonds be credible and fetch very low yields? They will be credible because of three reasons. Firstly, for Italy to participate in this scheme, it will have to sign a super-seniority clause with the ECB, just like countries that borrow from the IMF sign a super-seniority clause with the IMF. In other words, even if Italy in twenty years’ time cannot repay all of its debts, the debit account has priority status. It has to be repaid before anything else is repaid. That’s one reason why those ECB bonds will be credible.
JB: Aren’t the yields for the normal debt, which is beyond the Maastricht level, wouldn’t the interest rate rise for the other debt?
YV: What will rise is the difference between the interest payments for the good debt, the MDC, and the interest payments of the bad debt. But this is so by design, to counter arguments that our scheme causes moral hazard problems. What I want to stress is that, as the long total interest payments, for the Eurozone as a whole, shrink, the interest rate of the bad debt will probably fall too. So, we have the best of both worlds: A large interest rate differential between the bad and the good debt (to stem moral hazard issues) and an overall fall in interest rates (to put paid to the debt crisis).
JB: In the German political position there may be another point against this part of your proposal. If you look at the low interest rates for pension funds for the private security systems and so on, if you take a large part of the public debt and give it via the ECB to the investors so that the interest rates are falling more than even now, then the interest rates for the whole private security system, social security system, will also have a big problem. What do you think of this?
YV: This argument, if made, will have no connection with economic reality whatsoever. The problem of the pension funds is independent of the problem of Italian or Spanish yields. If Italy’s average refinancing rate comes down, that doesn’t mean that a pension fund’s interest rates are going to come down. Indeed, the opposite is more likely.
Why is it so hard at present for pension funds and investors, German deposit holders, to get any significant interest on their money? The reason is that Europe is in a recession, because of recessionary forces, because we have a glut of savings with nowhere to go, the result being that the ECB is forced to keep overnight interest rates close to zero. By quashing the debt crisis, through the issue of ECB bonds and the other policies we are proposing, growth rates will be restored and the ECB will be able to push up normal interest rates, thus restoring the growth prospects of German pension funds. Moreover, the ECB bonds will effectively sponge up part of those excess savings, and what we are going to have is an increase in the rate of return to capital, in Germany as well (if the recession goes away in the Eurozone as a whole). So, the rate of return to savings in the medium term is going to improve if we make the debt crisis go away, because the debt crisis is what is effectively reinforcing that vicious cycle of austerity, which reinforces low growth, which keeps the rate of return to capital very low.
The above lead me to discuss the worst part of the the crisis, which concerns underinvestment. I think that, by any measurement, Europe is facing a crisis of investment, both in aggregate and in a disaggregated way. Aggregate investment in Europe now is pitifully low, not just in the deficit countries, but also in Germany. This is a problem that – especially in view of the energy crisis that Europe is facing compared to the United States and other parts of the world (with an energy policy that has gone nowhere fast with loss of long term competitiveness vis-a-vis Asia in particular), this is something that should worry everybody in Europe – as far as the periphery is concerned, we are talking about negative investment at the moment (and this flies in the face of the stated objective which is to bring the competitiveness of a place like Greece or Portugal up). Competitiveness will not come because people are forced by desperation to accept ridiculously low wages. You need investment in capital in order to increase and enhance labor productivity. So we need a European New Deal, effectively and investment-led recovery.
One of the great problems in Europe as far as I’m concerned comes from the Gestalt which informs public opinion on what is actually going on around us. You know, everybody keeps thinking about the debt crisis, but very few people are aware that the other side of the debt crisis is a glut of savings. Never before had so many corporations had so much money slashing around, uninvested. Similarly with individuals and pension funds. There are mountains of idle savings, and the issue is how do you energize these idle savings.
It seems to me that what you have is self-confirming negative expectations, which are creating this major gap between investment and savings. And the way to deal with that in Europe neither through austerity nor through taxing and spending. It’s through utilizing the European Investment Bank and the European Investment Fund, which Europeans have created but underutilized. They are very good institutions that have the capacity to play that surplus-recycling-mechanism role that is not being played by the banks now. The only thing that stops the European Investment Bank and the European Investment Fund from doing this is the convention in Europe that 50% of investments will have to be funded by the nation state in which the investment occurs. Of course the nation state is bankrupt now, or it is fiscally constrained. Even surplus countries like Austria are cutting down on public investment.
So the question is how can we unleash the European Investment Bank and the European Investment Fund in a way that effects a European New Deal, which is what we need in the midst of our current slump. We recognize that the European Investment Bank cannot be asked both to fund more than 50% of each project and increase massively the number of projects it funds – as it would have to do if it were to spearhead a European New Deal. Were it to do so the yields of its own bonds, of the European Investment Bank’s bonds, will go up. However, we suggest the following: If the EIB has an idea for a large scale project in, say, Italy, why can’t the EIB collaborate with the ECB? The EIB could issue, as it does, 50% of the necessary bonds to fund the project and the ECB can proceed with a net issue of additional ECB bonds on behalf of Italy – recalling that the ECB, as per our Modest Proposal, already issues ECB-bonds on behalf of Italy as part of the Limited Debt Conversion Program that we discussed above. And who repays these bonds? The investment project itself! Just as the EIB gets its bonds repaid by the revenues of the projects it backs, so will the ECB’s.
So, effectively, the ECB will be supporting not the Italian state, but the European Investment Bank which can always make sure that there is an adequate safety, investment cushion, so that the ECB will always get its money back. In that way, the European Investment Bank and the European Central Bank are together playing a crucial role in creating the mechanism by which the idle savings, not just within Europe, but internationally, are going to be energized as productive investment in Europe.
Finally, regarding the humanitarian crisis, I think it is important that the Eurozone is seen to be proactive in fighting the abject, the absolute poverty that the euro has caused directly. As the Eurozone, rather than as differently-constrained national entities.
The problem with this is that Europe lacks the federal Treasury that allows the United States to run the highly successful food stamps program, which plays such a significant role in alleviating hunger and absolute poverty in America. In Europe we don’t have a federal treasury, and because we want our proposal to remain modest, we are not proposing that we create one.
However, in Europe we have the European system of central banks which has this accounting mechanism TARGET2 that Hans-Werner-Sinn has a lot to say about in Germany, as I’m sure you know (and with which I am in total disagreement, by the way). TARGET2 is a mere accounting mechanism that tots up the ‘external’ imbalances of member-states within the Eurozone. During ‘normal’ times (before 2008 that is), these imbalances were close to zero. The current account deficit of a deficit state (e.g. Greece or Portugal) was balanced out by a flood of capital coming from the surplus countries (e.g. Germany). But when the Crisis hit, the capital flows disappeared and, all of a sudden, the central banks of the Periphery had an accounting TARGET2 deficit toward the Bundesbank, and were charged interest on it – monies that accumulate within the European system of central banks and then is passed on to the surplus country central banks which, in turn, pass it on to their government. In summary, before the crisis started, TARGET2 did not generate interest payments in favor of the central banks of the surplus countries.
Once the crisis began and the burden of adjustment fell on the deficit countries, and the burden of adjustment gave rise to impoverishment of those countries, you simultaneously had a very significant increase in interest payments accumulated and being distributed amongst the central banks of the surplus countries. Channelling the TARGET2 ‘profits’ to the surplus country governments is a dubious practice that does the European ideal no justice. To have a TARGET2 surplus, a nation has already benefited from imbalanced trade, with the deficit member-state unable to adjust through devaluation. In this sense, the surplus nation has already benefited from the euro. To benefit again, this time through TARGET2, is to add insult to injury. And when these benefits are exacted at a time when the deficit countries are bleeding and its peoples reduced to abject poverty, Europe is descending the final steps to a moral hell.
But why can’t we retain the accumulated TARGET2 interest and, without any treaty or ECB charter changes, agree at the Eurogroup level that this money which accumulates in TARGET2 in the form of interest payments (and which, let me repeat, are born out of the same causes that gave rise to depression in the deficit countries) should fund a Eurozone-wide food stamp program that is going to have very positive effects not just in ameliorating hunger and therefore stem the rise of the Nazis in my country, in Greece, for instance, but it will also be a solidifying, politically very important signal to the peoples of Europe. You see, nothing can revive confidence in the idea of Europe more than poor families receiving a check or a food stamp signed by the European Central Bank that allows them to feed their children. It is hard to overstate the importance of such direct payments in creating a sense that we belong to a union that is looking after the needy. A payment that doesn’t go through the member-state government. That doesn’t involve local politicians at all. I think that the benefit that this symbolic – and actual – benefit would be fantastic. Also, do note that it does not involve any new taxes, any new institutions, or treaty/charter changes.
So there, four realms of the crisis and four simple policies for dealing with them. I think I’ve tired you with their details sufficiently.
RS: I was going to ask you a bit about current account surpluses in Germany, in the North, and how to fight the deficits in the South other than by stopping buying things. More importantly the deficits of, say, Greece. What does Greece actually export? What are its primary exports?
YV: Well, the primary export of Greece is, of course, tourism, and shipping. Besides that, over the last three years there’s been an increase of exports of even some small, sort of low capital utilization manufactured goods, but primarily products like wine, organic and specialist foodstuff. But as I said, it’s primarily tourism.
The important issue here is that the current strategy of trying, supposedly, to overcome the crisis by improving the export competitiveness of Greece, Portugal, Spain and so on is logically incoherent at a time when you have surplus savings, both in the surplus countries and in the deficit countries, savings exceeding investment, both in Germany and in Greece, in Holland and in Portugal, in Finland and in Spain. While this savings glut exists everywhere throughout the Eurozone, any attempt to remain within the confines of the Fiscal Pact and effectively eliminate budget deficits is going to turn the whole of the Eurozone into a mercantilist beast. The only way of achieving this objective (or eliminating both budget and trade deficits in the Periphery), as long as savings exceed investment, is by having a huge current account surplus for the Eurozone as a whole. Now in countries like Spain and Italy, you can see that the current account deficit has been almost eliminated, and in some cases it has been turned into a surplus. While Germany maintains its own high current account surpluses, the Eurozone as a whole is becoming increasingly a surplus region, a current account surplus region. To balance the Eurozone internally, this aggregate current account surplus must becomes twice that of China. Now that is globally unsustainable.
For a start, even if the Eurozone were to achieve such a surplus, the euro will rise inexorably, therefore undermining this surplus. And even if it doesn’t, even if it doesn’t undermine that surplus, Europe will have become a fiend on the world stage; we will be undermining the rest of the globe, the United States, Latin America, China. In our unwise attempt to move in that direction, we are already becoming a greater threat to global balance than China ever was, while at the same time we are inflicting upon ourselves a decline in aggregate demand, through austerity, which means that we are becoming a black hole for the rest of the planet in terms of reducing demand for other nations’ exports. Thus, Europe is today the greatest exporter of recession to the rest of the world. And that can’t be good for us, either.
We are moving into a position of silly macroeconomic policies that resemble what was going on in the 1930’s, a postmodern version of competitive devaluation. We’re effectively being very bad global citizens, while at the same time undermining the coherence of the European Union itself.
RS: That’s pretty straightforward, but it’s unfortunately not well understood here. But let’s just assume that the crisis was over. Is it possible for Greece to run balanced current accounts?
YV: Probably not, until and unless some fundamental change occurs in Greece’s productive matrix. So what? Is the North of England ever going to have a balanced current account vis-a-vis the rest of England? Well, it never has in the last 50 years and never will in the future. Is Arizona ever going to have a balanced current account with California? No. But who cares? There are always going to be deficit regions and surplus regions within an economic union. In Germany itself there are regions within Germany, especially in the East, that will always have a current account deficit vis-a-vis the rest of Germany. So either we want to have an economic and monetary union, or we don’t. If we do, it is the apotheosis of idiocy to expect that every region within it will be in trade balance with every other region.
RS: The thing that’s missing, of course, with the rest of Europe is the federal government that pays the pensions and pays the food stamps and that sort of thing.
YV: That’s quite right. This what we are trying to do with our Modest Proposal. We are trying to simulate a federal government without federation and without further loss of national sovereignty.
At the moment Europe is sadly caught up in a false dilemma. On the one hand, there is the standard view that the way we are going in Europe today is leading us out of the crisis and it’s working. I don’t share that view. I think that Europe is proceeding along the lines of disintegration. The other part of the false dilemma is to say that federation is the alternative. I don’t think that is possible, and I don’t think it’s desirable, either.
So the way I narrate the Modest Proposal is to say that it is proposing a third road which I like to refer to as “Decentralized Europeanization”. The idea is to Europeanize these three or four basic realms. Europeanize the banking sector, Europeanize a portion of the public debt, Europeanize aggregate investments through the European Investment Bank and in association with the European Central Bank. Finally, Europeanize a hunger and poverty alleviation program. Once these realms are Europeanized, that immediately allows more degrees of freedom to national governments to run a balanced budget even if the external position of a country like Greece or Portugal is negative. For if aggregate investment, if the banking malaise, if a portion of the public debt, if a food stamp program are Europeanized, then the Athens government can then be asked to run a balanced budget while no one will even want to know whether Greece or Portugal have a current account surplus with Germany (just as no one in the United States knows, or cares to know, if New Mexico has a current account deficit with Texas).
RS: In order to sustain a current accounts deficit, it would require some transfer payments to be made, wouldn’t it?
YV: If the Greek banks stop being Greek, it would be a Godsend. And if part of the public debt is serviced by the ECB, while aggregate investment is directed by the European Investment Bank, then that creates productive capital inflows into Greece. Immediately, you can run a mild current account deficit while the government maintains a balanced budget. And a sustainable current account deficit, which will be as sustainable as it is within the United States or within Germany today. Hopefully, if these investments create a tenet of private investments, too, in new technologies, in green energies, etc., Greece has the weather conditions that would allow it to develop a potentially quite successful renewable sector. Then perhaps in the long run, even a place like Greece could get out of the mire of being a deficit region in perpetuity.