5. CONCLUSION: Four realistic policies to replace five false choices

Three years of crisis have culminated in a Europe that is losing its dynamism in the eyes of the world and its legitimacy in the eyes of Europeans. Europe is unnecessarily back in recession. While the bond markets were placated by the ECB’s actions in the summer of 2012, the Eurozone remains on the road toward disintegration.

While this process eats away at Europe’s potential for shared prosperity, European governments are imprisoned by false choices:

  • between stability and growth
  • between austerity and stimulus
  • between the deadly embrace of insolvent banks by insolvent governments, and an admirable but undefined and indefinitely delayed Banking Union
  • between the principle of perfectly separable country debts and the supposed need to persuade the surplus countries to bankroll the rest
  • between national sovereignty and federalism.

These falsely dyadic choices imprison thinking, and immobilise governments. They are responsible for a legitimation crisis for the European project. And they risk a catastrophic human, social and democratic crisis in Europe.

By contrast the Modest Proposal counters that:

  • The real choice is between beggar-my-neighbour deflation and an investment-led recovery combined with social stabilisation. The investment recovery will be funded by global capital, supplied principally by sovereign wealth funds and by pension funds which are seeking long-term investment outlets. Social stabilisation can be funded, initially, through the Target2 payments scheme.
  • Taxpayers in Germany and the other surplus nations do not need to bankroll the 2020 European Economic Recovery Programme, the restructuring of sovereign debt, resolution of the banking crisis, or the emergency humanitarian programme so urgently needed in the European periphery.
  • Neither an expansionary monetary policy nor a fiscal stimulus in Germany and other surplus countries, though welcome, would be sufficient to bring recovery to Europe.
  • Treaty changes for a federal union may be aspired by some, but will take too long , are opposed by many, and are not needed to resolve the crisis now.

On this basis the Modest Proposal’s four policies are feasible steps by which to deal decisively with Europe’s banking crisis, the debt crisis, underinvestment, unemployment as well as the human, social and political emergency.

Version 4.0 of the Modest Proposal offers immediate answers to questions about the credibility of the ECB’s OMT policy, the impasse on a Banking Union,  financing of SMEs, green energy and high tech start-ups in Europe’s periphery, and basic human needs that the crisis has left untended.

It is not known how many strokes Alexander the Great needed to cut the Gordian knot. But in four strokes, Europe could cut through the knot of debt and deficits in which it has bound itself.

  • In one stroke, Policy 1, the Case-by-Case Bank Programme (CCBP), bypasses the impasse of Banking Union (BU), decoupling stressed sovereign debt and from banking recapitalisation, and allowing for a proper BU to be designed at leisure
  • By another stroke, Policy 2, the Limited Debt Conversion Programme (LDCP), the Eurozone’s mountain of debt shrinks, through an ECB-ESM conversion of Maastricht Compliant member-state Debt
  • By a third stroke, Policy 3, the Investment-led Recovery and Convergence Programme (IRCP) re-cycles global surpluses into European investments
  • By a fourth stroke, Policy 4, the Emergency Social Solidarity Programme (ESSP), deploys funds created from the asymmetries that helped cause the crisis to meet basic human needs caused by the crisis itself.

At the political level, the four policies of the Modest Proposal constitute a process of decentralised europeanisation, to be juxtaposed against an authoritarian federation that has not been put to European electorates, is unlikely to be endorsed by them, and, critically, offers them no assurance of higher levels of employment and welfare.

We propose that four areas of economic activity be europeanised: banks in need of ESM capital injections, sovereign debt management, the recycling of European and global savings into socially productive investment and prompt financing of a basic social emergency programme.

Our proposed europeanisation of borrowing for investment retains a large degree of subsidiarity. It is consistent with greater sovereignty for member-states than that implied by a federal structure, and it is compatible with the principle of reducing excess national debt, once banks, debt and investment flows are europeanised without the need for national guarantees or fiscal transfers.

While broad in scope, the Modest Proposal suggests no new institutions and does not aim at redesigning the Eurozone. It needs no new rules, fiscal compacts, or troikas. It requires no prior agreement to move in a federal direction while allowing for consent through enhanced cooperation rather than imposition of austerity.

It is in this sense that this proposal is, indeed, modest.

8 thoughts on “5. CONCLUSION: Four realistic policies to replace five false choices

  1. A Smart proposal that many should agree to, but fails to address the long term underlying problem of unfettered credit both at institutional , bank, and individual level. As we are in an era now where money has no link to any base , such as gold, It is in this area of change that all currencies have to look at to ensure stability globally.

  2. Yiannis,

    Your modest proposal is an interesting intellectual exercise on the macro level with the stated appeal of these measures are not based on fiscal transfers. You imply that Europeanization entails not only a collective approach at solving the stated problems but also offers the checks and balances that the proposed measures work as expected.

    To see how this would work, let us look now at the “the recycling of European and global savings into socially productive investment” you propose. What type of guarantees will be offered to investors that the that they would get a return on their capital and most importantly that the funds would not be wasted? Are you looking for European bodies managing these investments? Would these bodies supplant the national governments with the gridlock inefficiency and corruption they are known for?

    I cannot see any long term success that does not involve restructuring of the way problem states operate (or not operate..). The “Europeanization” entails reduced state sovereignty but not elimination. Which takes us to the much talked about structural changes that sovereign states (and Greece in particular) are loath to take.
    When the crisis hit Greece, I hoped that it would act as a catalyst for change. The resistance for change from entrenched interests makes me less optimistic about the future. Changing mentality may take long time.

    So my question Yianis is how do you see the proposals you make are not annulled in practice. We had fiscal transfers in the periphery for 30+ years and the results were in many cases the opposite of the intended goal (see agricultural subsidies in Greece for example). Without the called for structural changes (which I do not see them mentioned in your writings) we run the danger of repeating the failed policies of the past.


  4. I entirely agree with Mauro. The banks did not feel the need to comply with any “reasonable ceilings” while they were playing bingo with other people’s money. The bubble that finally exploded in everybody’s face was caused by unrestrained greed on the part of the financial markets in collusion with deluded and incompetent political institutions, making bad policy or having no policy other than looking after their own interests. Until the banks realise that sooner or later their greed will backfire on them, too, and until the political institutions do their jobs properly. No proposal – modest or otherwise – will work.

    I fear it will have to get a good deal worse before it can get better.

  5. I believe we need to return to looking after people and not banks and institutions. Following policies of full employment would bring people to contribute to society and not for the few to get rich whilst others are racing into poverty.

  6. I am no economist either. Just a normal academic trying to grasp reasoning and hopefully some sort of hope. Honestly I cannot. I check the unemployment records issued every so often and the only thing that I understand is that the so called “natural unemployment” percentage is stabilizing around 15% to 25% and nobody seems to be willing to do something. Perhaps there is no solution and hence no attempt. Perhaps unemployment is a vehicle to maintain some sort of passivity of the general public. It feels like we have started investing in the fear of unemployment in order to reduce/control reactions against bank debtocracy, against the need of society to be led by leaders with abilities. I am not sure anymore who is to blame more, is it the CDS, CDOs? is it the Troika? is it our fast moving technology (our only vehicle left to regenerate money)?

  7. I am no economist. But I know that central authority and organization can only achieve that much. In nature, in cells, in bodies, on earth, it can only be decentralized and if it didnt convey negative connotations I would dare say deregulated. It is just impossible to change our southern societies to function like northern finely tuned machines. So let it be. This experiment has gone awfully wrong, lets try something different. It’s not about money. It’s about people doing what they like best, how they like best.
    Yanis, thank you for trying.

  8. “While broad in scope, the Modest Proposal suggests no new institutions and does not aim at redesigning the Eurozone. It needs no new rules, fiscal compacts, or troikas. It requires no prior agreement to move in a federal direction while allowing for consent through enhanced cooperation rather than imposition of austerity.

    It is in this sense that this proposal is, indeed, modest.”

    Yes, it is. It seems to me a patch on the problems that the European system causes, but it doesn’t cope with the real question: why should European citizen accept a system which causes such problems? Why should we get along with an autocratic regime more and more self-referential and misanthropic?
    I cannot accept what Europe did to Greek people, I don’t want my sons to have a future like Greece present. However I see things are getting every day worse here in Italy, and our politicians leit motiv is “We have no money, we need austerity”. In fact we don’t have politicians, we have a bunch of accountants whose assignment is to comply with Eurocracy orders.

    Very modest proposal indeed, Yanis, and very disappointing.

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