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Fixing the Eurozone without PIIGS deflation and penury

The best e.g. most cogent and politically feasible, ideas for fixing Greece, Ireland, Portugal etc. and other members states in the cross hairs of bond market speculators comes from US-based economists and financial consultants.  Australia has picked up on this economic tendency too – see this intriguing paper by Phillip Lawn (you will have to buy it).

Their ideas are novel it has to be admitted, but that does not seem to be sufficient reason why they do not get coverage in any Irish economic publication or blog, Left or Right, that I can see.  Novel socially destabilising ideas do get coverage – the simple expedient of default of sovereign debt for instance: but novel, clever ideas from Modern Monetary Theory (MMT) that would avoid upheaval and unpredictable outcomes do not. I speak of course of Marshall Auerbach proposal blogged by Smart Taxes.

Another economist politician with useful proposals out of the same New Economic Perspective stable is Warren Mosler.   He writes of solutions to the Greek conundrum is reasonable and doable except that most economists politicians and  would have to rewrite their fiscal and monetary manuals. Here are some excerpts…

The weakening euro and rising oil prices raises the risk of ‘inflation’ flooding in through the import and export channels. With a weak economy and national govt credit worthiness particularly sensitive to rising interest rates, the ECB may find itself in a bind, as it will tend to favor rate hikes as prices firm, yet recognize rate hikes could cause a financial collapse. And should a govt like Greece be allowed to default the next realization could be that Greek depositors will take losses, and, therefore, the entire euro deposit insurance lose credibility, causing depositors to take their funds elsewhere. But where? To national govt. or corporate debt? The problem is there is nowhere to go but actual cash, which has been happening. Selling euro for dollars and other currencies is also happening, weakening the euro, but that doesn’t reduce the quantity of euro deposits, even as it drives the currency down, though the ‘value’ of total deposits does decrease as the currency falls.

It’s all getting very ugly as it all threatens the value of the euro. The only scenario that theoretically helps the value of the euro is a national govt default, which does eliminate the euro denominated financial assets of that nation, but of course can trigger a euro wide deflationary debt collapse. The ’support’ scenarios all weaken the euro as they support the expansion of euro denominated financial assets, to the point of triggering the inflationary ‘race to the bottom’ of accelerating debt expansion.

Bottom line, it’s all an ‘unstable equilibrium’ as we used to say in engineering classes 40 years ago, that could accelerate in either direction. My proposal for annual ECB distributions to member nations on a per capita basis reverses those dynamics, but it’s not even a distant consideration.

Where are ‘market forces’ taking the euro? Low enough to increase net exports sufficiently to supply the needed net euro financial assets to the euro zone, which will come from a drop in net financial assets of the rest of world net importing from the euro zone. This, too, can be a long, ugly ride.

As a final note, the IMF gets its euros from the euro zone, so using the IMF changes nothing…


“It remains my contention that Greece can dramatically upgrade its new securities simply by putting a provision in the default section that states that in the case of default the bearer, on demand, can use the securities at maturity value plus accrued interest to pay Greek government taxes. This makes the debt ‘money good’ for as long as there is a Greek government that levies taxes.

This would allow Greece to fund itself a low interest rates. It would also be an example for the rest of the euro zone and thereby ease the funding pressures on the entire region.

However, it would also introduce a new ‘moral hazard’ issue as this newly found funding freedom, if abused, could be highly inflationary and further weaken the euro.”

Paradadigmic revolutions have happened before, but only when the old paradigm offers only solutions that manifestly make no sense.  A rescue plan that involves heaping further debt on a debt burdened economy looks to me to be in that category.  In the immortal words of youthful impatient travellers everywhere …. Are we there yet? Are we there yet? Are we there yet? …

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Continuing the Discussion

  1. Mosler on euro endgame – Smart Taxes Network linked to this post on November 29, 2010

    […] on the Irish / eurozone question outlining a solution as  he and Marshal Auerback have outlined before. …My proposal remains the most sensible but not even a consideration- per capita ECB annual […]