Tue Jun 7th, 2011 at 01:32:34 AM EST
Saviour of Last Resort
Over the last few weeks Yanis Varoufakis and Tasos Patokos "have carried out a series of simulations regarding the Greek debt-to-GDP ratio under different scenaria." The graph below represents four scenarios that have been modeled:
The vertical axis represents Greece's debt to GDP ratio
Scenario 1 (the grey bars): Steady as she goes, with strict adherence to the EU-IMF targets
Scenario 2 (the yellow bars): As in Scenario 1 with the addition of a highly successful privatisation program worth 50 billion in aggregate which yields 15 billion in 2011, another 15 billion in 2012, and a further 10 billion each for 2013 and 2014. All these monies are used to retire debt.
Scenario 3 (the blue bars): The Modest Proposal adopted in part. In particular, we assume that Policies 1&2 are adopted but not Policy 3. In other words, we assume that a part of Greece's debt is transferred onto the ECB's books (which issues 20 year eurobonds to cover it) and that Greece repays that debt over the same span of time at no more than 3.3% (which is, in our estimation, above the ECB-bonds' market rates). Further, we assume that the stressed banks are recapitalised and accept, in exchange for EFSF capital, selective haircuts. Policy 3 (the use of eurobonds to energise the European Investment Bank) is however not adopted, under Scenario 3.
Scenario 4 (the pink bars): The Modest Proposal fully fledged. Policy 3 is also activated with the European Investment Bank carrying out investments within Greece to the tune of 0,9% of Greek GDP (and assuming a very modest multiplier of no more than 2).
The policies discussed above are described in A MODEST PROPOSAL FOR OVERCOMING THE EURO CRISIS by Yanis Varoufakis and Stuart Holland. The most "radical" policy resembles what Roosevelt did in the New Deal in the 1930s USA.
Of course the scenario in which everyone comes out OK requires revision of EMU and ESCB rules to create a fiscal union and a willingness to engage in fiscal policy beneficial to the whole of the EMU. In his blog Varoufakis makes the point, citing many others, that insisting on the current rules will break the Euro and prove very costly to all involved, as the surplus countries in the EMU will have a new currency, or currencies that will appreciate significantly, which will shut down the intra-EU trade in which they are currently enjoying surpluses and trigger a recession, (at a minimum), that hits both surplus and deficit nations.
There is a large price to be paid by all for the surplus countries indulging their desire to have scapegoats for their failings. But it can be quite amazing how far people will go to satisfy those desires. 0.9% of Greek GDP would be about €1.35 billion for the next few years. Undoubtedly, similar spending would be required for Ireland, Portugal, and, if properly done, all deficit countries.
This is far less than the liabilities already assumed in doomed attempts to save the un-salvageable. But, done properly, it would not "cost" the surplus countries that sum, as the ECB could just credit the national central banks with the money, although it might cause Austrian Austerians' and other Neo-Liberals' heads to explode.
If the "Modest Proposal" were implemented the deficit countries could continue to purchase the exports of the surplus countries. But a Götterdämmerung brought on by indulging atavistic impulses and fantasies of "winning" a zero sum game might prove irresistible -- to everyone's harm.