Yanis Varoufakis* – Financial Times?
Plan would have eased Greece’s chronic liquidity shortage, writes Yanis Varoufakis
A paradox lurks in the foundations of the eurozone . Governments within the monetary union lack a central bank that has their back, while the central bank lacks a government to support it.
This paradox cannot be eliminated without fundamental institutional changes . But there are steps member states can take to ameliorate some of its negative effects. One we contemplated during my tenure at the Greek ministry of finance focused on the chronic liquidity shortage of a financially stressed public sector and its impact on the long-suffering private sector.
Given the absence of a central bank to support the state’s endeavours, the Greek government’s arrears to the private sector (individuals and companies) have been perpetually deflationary since 2008. Indeed, arrears — due to significantly delayed returns from value added and income tax, and payments to suppliers — consistently exceeded 3 per cent of gross domestic product for five years. Meanwhile, a feedback effect boosts tax arrears which, in turn, reinforce the cycle of generalised illiquidity.
Our simple idea was to allow for multilateral cancellation of arrears between the state and the private sector using the tax office’s existing web-based payments platform. A reserve account could be created per tax file number on the tax office’s web interface and be credited with arrears owed by the state to that individual or organisation. Tax file number holders would be able to transfer credits from their reserve account either to the state (in lieu of tax payments) or to any other tax file number reserve account.
Suppose, for example, Company A is owed €1m by the state and owes €30,000 to an employee plus another €500,000 to Company B, which provided it with goods and services. The employee and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. In this case the proposed system would allow for the immediate cancellation of at least €210,000 in arrears. Suddenly, an economy like Greece’s would acquire important degrees of freedom within the existing European Monetary Union.
In a second phase of development that we did not have the time to consider properly, smartphone apps and citizens’ cards could add a degree of flexibility and accessibility guaranteeing wide adoption. The envisaged payments system could be developed to substitute for the absence of fully functioning public debt markets, especially during a credit crunch such as the one that has afflicted Greece since 2010. Private sector agents could be eligible to purchase credits from the tax office’s web interface, using their normal bank accounts, and to add them to their reserve account. These credits could be used after, say, one year to extinguish future taxes at a discount (for example, 10 per cent).
As long as the total tax credits were capped, and their magnitude fully transparent, the result would be a fiscally responsible increase in government liquidity and a quicker path back to the money markets to which governments, such as Greece’s had lost access.
As I was handing over the reins of the finance ministry to my friend Euclid Tsakalotos on July 6, I presented a full account of the ministry’s projects, priorities and achievements during my five months in office. The new payments system outlined here was part of that presentation. No member of the press took any notice.
But when a subsequent telephone discussion with a large number of international investors, organised by my friend Norman Lamont and David Marsh of the official monetary and financial institutions forum, was leaked despite the Chatham House rule that we agreed with listeners, the press had a field day. Committed to unlimited openness and full transparency, I granted OMFIF permission to release the tapes.
While I understand the press’s excitement emanating from elements of that exchange, such as having to consider unorthodox means of gaining access to my own ministry’s systems, there is only one matter of significance from a public interest perspective. There is a hideous restriction of national sovereignty imposed by the troika of lenders upon Greek ministers who are denied access to departments of their ministries pivotal in implementing innovative policies. When sovereignty loss, due to unsustainable official debt, yields suboptimal policies in already stressed nations, one knows that there is something rotten in the euro’s kingdom.
*The writer is the former finance minister of Greece
How the Greek Deal Could Destroy the Euro
By SHAHIN VALLÉE* – The New York Times
PARIS — The July 13 deal offering more financing for Greece has been billed as a last-minute step back from the brink, but the threat of a “temporary exit” from the euro proposed by a German coalition government has shaken the foundation of the euro in a far more fundamental way than meets the eye.
It has undermined what little Franco-German cooperation was left in economic affairs; it has made the single currency as it stands politically indefensible in France; and it has substantially increased the risk of euro exit across the monetary union. In short, the prospect of Grexit today has made a French, or even German, exit tomorrow far more likely.
These tensions are not new. Germany always thought of the euro as an improved exchange-rate mechanism built around the Deutsche mark, and France had bold but vague ambitions of a real international currency that would enhance the effectiveness of Keynesian economic policy. These fundamental differences were papered over at the launch of the euro because both François Mitterrand and Helmut Kohl agreed that the single currency should first and foremost serve as a means toward the greater aim of European political integration.
Since 2010, both this constructive ambiguity and the ultimate goal of further political integration were more or less preserved. But during the last round of Greek negotiations both broke down, and with them the glue that has until now kept France and Germany so tightly committed to the euro and to building it together.
Indeed, the European institutions led by Germany seem to have decided that waging an ideological battle against a recalcitrant and amateurish far-left government in Greece should take precedence over 60 years of European consensus built painstakingly by leaders across the political spectrum.
By imposing a further socially regressive fiscal adjustment, the recent agreement confirmed fears on the left that the European Union could choose to impose a particular brand of neoliberal conservatism by any means necessary. In practice, it used what amounted to an economic embargo — far more brutal than the sanctions regime imposed on Russia since its annexation of Crimea — to provoke either regime change or capitulation in Greece. It has succeeded in obtaining capitulation.
Through its actions, Germany has made a broader political point about the governance of the euro. It has confirmed its belief that federalism by exception — the complete annihilation of a member state’s sovereignty and national democracy — is in order whenever a eurozone member is perceived to challenge the rules-based functioning of the monetary union. In essence, Germany established that some democracies are more equal than others. By doing so, the agreement has sought to remove politics and discretion from the functioning of the monetary union, an idea that has long been very dear to the French.
The negotiations leading to the Greek agreement also destroyed the constructive ambiguity created by the Maastricht Treaty by making it absolutely clear that Germany is prepared to amputate and obliterate one of its members rather than make concessions. Germany appears to believe that the single currency ought to be a fixed exchange-rate regime or not exist at all in its current form, even if this means abandoning the underlying project of political integration that it was always meant to serve.
Finally, and perhaps most importantly, Germany signaled to France that it was prepared to go ahead alone and take a clear contradictory stand on a critical political issue.
This forceful attitude and the several taboos it broke reveal that the currency union that Germany wants is probably fundamentally incompatible with the one that the French elite can sell and the French public can subscribe to. The choice will soon be whether Germany can build the euro it wants with France or whether the common currency falls apart.
Germany could undoubtedly build a very successful monetary union with the Baltic countries, the Netherlands and a few other nations, but it must understand that it will never build an economically successful and politically stable monetary union with France and the rest of Europe on these terms.
Over the long run, France, Italy and Spain, to name just a few, would not take part in such a union, not because they can’t, but because they wouldn’t want to. The collective G.D.P. and population of these countries is twice that of Germany; eventually, a confrontation is inevitable.
This sorry state of affairs is not of Germany’s making alone. It began largely because of France’s romantic and somewhat naïve view of the monetary union; it deepened due to France’s political absence from European affairs since the beginning of the crisis; and it was compounded by the traumatic shock caused by financial stress on French banks and government bonds during the summer of 2011, which laid bare the economic enfeeblement that continues to undermine France’s self-confidence.
Meanwhile, Germany has built a politically and morally coherent narrative that obscures an economically deceptive vision based on the idea that abiding by the rules alone can create prosperity and stability for the European Union as a whole. This narrative has wide support across the German political spectrum and the clear backing of the German public.
France has still not completely overcome its inclination to put French sovereignty and decision-making first and has failed to articulate its own post-Maastricht vision of a prosperous monetary union, backed by a federal budget, governed by a real European executive power and legitimized by the European Parliament.
Despite the recent call by President François Hollande to address these issues, progress is unlikely. That’s because French elites are now unable to convince the public of the merits of the Union’s current economic policies in general — and toward Greece in particular. They are also too divided to propose a new shared vision, too disoriented to challenge the German narrative, and too afraid to start building alliances with like-minded countries such as Italy and Spain.
This unhappy marriage could last for years, but it will substantially increase the chances of anti-establishment parties coming to power across Europe, because mainstream leaders can no longer disprove the assertion that the euro as it stands has become both economically and politically destructive.
This will force all parties, including pro-European ones, to engage in a discussion about the potential merits of leaving the currency union and it will encourage political posturing, especially in France, where there is an undercurrent of Germanophobia that is easy to rekindle.
Regardless of what happens in Greece now, the July 13 agreement has made the prospect of a future euro breakup far more likely. The question is whether it will take the form of an orderly departure by Germany or a prolonged and economically more destructive exit by France and the south of Europe.
*Shahin Vallée, a former adviser to the French economy minister and the president of the European Council, is a senior economist at an investment management firm.