A modest proposal for resolving the eurozone crisis

Since 2008, we are still meddled in the euro zone crisis. But the state of affairs is far from being reassuring for the entire European community and its actors. Although the 'ethos' of the crisis seems to be alleviated, it has aggravated  public debt to limit the risks of deflation caused by the overwhelming financial crash in 2007 and the current  threat which persists on the public debt of 18 countries sharing the same currency.  

There is however little consensus on how to drive the crisis. The EU did not have the mechanisms and procedures to handle it. Most of the crisis management  was left to improvisation 

In 2013, the current Greek Finance minister, Y.Varoufakis wrote a paper with J.Galbraith and Stuart Holland on how to resolve the eurozone crisis.  It was entitled “A Modest Proposal for Resolving the Eurozone Crisis” . The proposal is far from being modest: "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."

The proposal departs from the triple nature of the crisis - banking crisis, sovereign debt crisis, under-investment crisis and provides three policy responses to the eurozone crisis. It also takes for granted existing political constraints - no ECB purchase/monetisation  of sovereign debt; no joint guaranteed euro-bonds; no proper European Treasury. 

First, it deals with the banking crisis through a banking Union area. The Europeanization of the banking supervision is a step forward toward  a better functioning monetary union. It is proposed that the banks are restructured and recapitalized through the European Stability Mechanism (ESM). The aim is to break the link between sovereign debts and banks losses as it happened in most countries. 

Second, the conversion of member States sovereign debt in compliance with the Maastricht Treaty (up to  60% of their GDP) into a debt issued by the European Central Bank. This would mean a partial 'mutualization' of debts but still respects the principle of 'non-monetisation' of debt (no purchase or guarantee of sovereign debt). This action can be pursued in accordance with tart.20 of the Treaty whereby "reinforced co-operations aim to the realisation of the objectives of the Union, to preserve its interests and reinforce its process of integration". At the same time, the ECB would continue its Outright Monetary Transactions (OMT) programme under which it makes purchases in secoindary sovereign bond markets under certain conditions of bonds issued by Eurozone member States. In fact, the ECB has gone further with its recent QE programme to buy financial assets from banks or other financial assets to stimulate the economy. 

Third, an investment led recovery and convergence programme financed by the European Investment Bank (EIB). This programme would be financed through bonds issued by the  (EIB) to capture the excess of savings in Europe and outside Europe to direct it toward European regions most in need. the new investments would then enable the provision of  goods and services, such as infrastructure, education and other public goods to bridge the gap in terms of competitiveness and generate income to reimburse most urgent debt in weaker countries. In this regard, the Juncker Plan, with the creation of the European Fund for Strategic Investments is an important step in that direction.   

Furthermore, these measures will be accompanied by a vast programme of social solidarity and emergency to combat the humanitarian crisis in certain countries where poverty has soared at unprecedented levels. Two specific actions are foreseen in the 'modest proposal' : a programme of 'food stamps' like in the United States and a European programme ensuring minimum access to energy. 

None of these proposals seems out of reach, nor unrealistic. They are part of a progressive economic policy based on concrete measures which do not require any major change in the current European institutions. Only political will is missing because any step toward a more integrated Union would put in question the authority of  national leaders without any vision for Europe.