Politically Plausible Proposals for Resolving the Eurozone Crisis

The Modest Proposal for overcoming Europe’s Crisis is based on the observation that:

• the dilemma between austerity and debt-fuelled growth policies is irrelevant

• lax monetary policy on behalf of the ECB, or greater wage/price inflation in Germany and the rest of the surplus nations is unlikely to deal with the Crisis effectively

• Germany and the rest of the surplus nations need not bankroll either a European Recovery and Re-balancing Program nor the management of excessive sovereign debt

• federal moves and Treaty changes are neither desirable nor necessary

On the basis of these observations, the Modest Proposal’s three policies are simple, elegant and feasible steps by which to deal decisively with Europe’s banking crisis, the debt crisis and the investment-imbalances crisis. In one stroke (Policy 1), by creating a single banking sector, banking losses are separated from stressed sovereign debt and recapitalisation can proceed properly and rationally. In another stroke (Policy 2), the Eurozone’s mountain of debt shrinks (through the ECB-EFSF/ESM conversion of Maastricht Compliant member-state Debt). Lastly, with a third stroke, the EIB-EIF become an effective surplus recycling mechanism, of the sort that no currency area can do without.

Read it at Yanis Varoufakis
The Modest Proposal for Overcoming the Eurozone Crisis, Version 3.0
By Yanis Varoufakis and Stuart Holland

Over the past couple years I have read through countless proposals for resolving the Eurozone crisis. Most policy options seemed overly optimistic about the potential for policymakers and central bankers to let go of previous rules and reservations. So far those opinions have proven true and left many pundits sorely disappointed.

Acknowledging the current political environment, this paper recognizes upfront a few of Europe’s primary constraints:

(a) The ECB will not be allowed to monetise sovereigns directly (i.e. no ECB guarantees of debt issues by member-states, no ECB purchases of government bonds in the primary market, no ECB leveraging of the EFSF-ESM in order to buy sovereign debt either from the primary or the secondary markets)

(b) Surplus countries will not consent to the issue of jointly and severally guaranteed Eurobonds, and deficit countries will not consent to the loss of sovereignty that will be demanded on them without a properly functioning Federal Europe

(c) Federation (e.g. the creation of a proper European Treasury, with the powers to tax, spend and borrow) or Treaty Changes cannot, and will not, precede the Crisis’ resolution.

I agree with the authors that relaxing these constraints is highly doubtful, despite the potential benefits. The policy proposals put forth here still require a large leap of faith (and probably further economic/political deterioration), nevertheless they represent some of the most plausible solutions and will hopefully begin seeping into mainstream discussion in the near future.