If I were Emperor of Europe here is what I would do: I would have the European Central Bank (ECB) implicitly guarantee Greek debt by offering to buy Greek debt at some particular interest rate and then pay for the purchase of Greek debt by issuing a "Eurozone Bond" backed by the full faith and credit of all the countries in the Eurozone.
The buying of Greek debt would not be inflationary since the ECB would effectively be sterilizing the purchase of Greek debt with the issuance of Eurozone debt. It would also relieve the fiscal pressure on the countries who are putting up government funds to help shore up the Eurozone. These countries could still--in partnership with the ECB--exercise control and impose all the austerity conditions they want.
This would also help push the Euro ever so slightly toward its full potential as a competitor currency of the dollar since it would finally create a true Eurozone debt instrument. Obviously, though, the market would not be very large or liquid but perhaps this market could be opened up to other countries. While the EU does not seem overly concerned with the problem of moral hazard it would be relatively easy to limit countries from taking advantage of this market if the EU actually started to enforce their rules governing debt to gdp ratios.
I am double minded about what interest rate to charge the Greeks. A penalty rate seems appropriate, but obviously that may only make it more difficult for Greece to pay down it's debts. At any rate, some kind of risk premium above what the ECB would get on the Eurozone instrument seems appropriate and would be profitable for the ECB. And if the Greeks finally do default? Well, then the Germans can put their real money to work.
Perhaps unfortunately, I do not run Europe and the ECB seems like a profoundly conservative and unimaginative institution. That may be a necessary thing in Europe, it may also be a major liability for Europe to have monetary policy nonexistent at the national level and unhelpful at the supra-national level. While the ECB has been engaged in what the Wall Street Journal calls a "stealth bailout" of Europeans banks holding Greek debt they may do well to push things further. Legal and political realities notwithstanding.
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Thank you for this post. I am not a student of economics, but am someone who is now interested in this field so have been researching about modern economics especially after we got rid of the gold standard.
ReplyDeleteYou make a valid point, "issuing a "Eurozone Bond" backed by the full faith and credit of all the countries in the Eurozone."
Why is that almost all, mainstream economists and ALL politicians, seem to have a collective amnesia about no longer being on commodity based currency system?
For a layman like me it seems so simple about this fact:"full faith and credit" - that a sovereign nation, like the USA, CANNOT run out of money.
Monetary Theory like MMT makes it so simple that anyone can make sense of it, but the people in control want to keep it complicated so that the masses don't know about it. This is so scary, but more and more people are waking up to it.
BTW, I haven't seen any post from you about the S&P downgrade debacle and how it had the opposite affect on the US Dollar. See the US did not run out of its money and now the treasury is thinking of charging negative interest on its bonds. So figure.