A New Start for the Eurozone: Dealing with Debt

The CEPR has published a new report on the eurozone (I am one of the co-authors).

Outline: This report, the first in the Monitoring the Eurozone series, addresses the measures Eurozone countries need to take to guard against returning financial instability that could threaten a sustainable recovery. The authors consider stock operations, lending structures and regulatory changes in protecting sovereign debt on a national and Europe-wide level.


Report is here.

VOX summary is here.

17 replies on “A New Start for the Eurozone: Dealing with Debt”

from the VOX …

‘Political Capital’ remains the crux of the issue; the ‘solidarity index’ is at an all time low …. democratic deficit at an all time high …. oligarchs in clover.

@all economists

Towards some interdisciplinary ‘humility’ …

‘Ten years ago, a survey published in the Journal of Economic Perspectives found that 77 percent of the doctoral candidates in the leading American economics programs agreed or strongly agreed with the statement “economics is the most scientific of the social sciences.”

In the intervening decade, a massive economic crisis rocked the global economy, and most economists never saw it coming. Nevertheless, little has changed: A new paper from the same publication reveals how economists continue to believe that their science is superior to all other social sciences, such as political science, sociology, anthropology, etc. While there may be budding intentions to appeal to other disciplines in order to enrich their theories (especially psychology and neuroscience), the reality is that economists almost exclusively study—and cite—each other.


This is an excellent paper with some eminently sensible proposals, but it also highlights why they haven’t a snowball’s chance in hell of being implemented:
“…reforms at the European level have come to a standstill and all debates on increasing fiscal and political integration have remained moot. Some countries have implemented significant fiscal consolidation and structural reforms, but others have lagged.”

Those who wield the ultimate power in the EU – that is, the power to decide who governs and how they govern – have chosen a low growth future because it suits their interests. These ‘power-brokers’ comprise those who have ‘property rights’ to secure jobs, to pensions, to income-generating wealth and property and to the capture of economic rents. Innovation, economic growth, new entrants and other dynamic changes that might benefit the majority of citizens are certainly not in their interests unless they can control these forces.

Though they don’t comprise a majority of voters, these voters vote for centre-right parties that protect and advance their interests. And these parties, playing dog whistle politics, attract support from lower income voters who actually vote against their own interests. All of the other citizens whose interests are being damaged by centre-right parties (and who are in a majority) either don’t vote or spread their vote among parties which are either incapable or unwilling to protect and advance their interests. The left is split between those who cling to outdated and failed ideological dogma and those who attempt to ‘triangulate’ to the centre. And all of these parties are under assault from green fantasists on one side and populist nationalists (with varying elements of ugliness) on the other.

It will take some time before the political and demographic forces shift to create a change – and this change mightn’t be very pretty.

Philip, could you possibly explain to us briefly how the no-transfer instruments proposed for the “one-time debt stock operation to rapidly reduce sovereign debt” are logically different from sovereign debt? Your core proposal seem to be to replace the existing set of liabilities with a set of differently structured liabilities of equivalent value. Is this not really a form of debt reprofiling rather than debt reduction?

“With the election of a belligerent new government that has unmistakably promised to obtain debt relief, the Greek drama seems set to continue.”

The FT reports today that Germany’s finance minister virtually ruled out a deal next week which would release bailout funds to Athens, increasing the possibility that Greece could go bust as soon as May.

“Nobody expects that there will be a solution,” Schäuble said of next week’s meeting.

To get Germany on board to support the CEPR proposal, it would have to have confidence that a new government in a member country would not go its own merry way after getting debt relief.

So maybe letting the Greek government move closer to the cliff or have a few weeks of chaos, could have the benefit of making the EMU seem less of a voluntary association.

fyi – a must read …

Bill Black: How the “Super Crunchers” Became the “Super Torturers” of Finance Data

Posted on April 16, 2015 by Yves Smith

Yves here. Many of the concerns about Big Data focus on the surveillance apparatus used to collect it, or on the naive modeling approaches, like attributing causality to mere correlations. Here Black addresses an established problem: that of deliberate abuse of models.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives.


The core fault with this paper is in relation to its appreciation, or estimation, of the actual state of play.

“Greece is special in many ways and will have to be dealt with in a different way from the other member countries, but the renewed turbulence it has caused once again has highlighted that the construction of the monetary union remains incomplete.”

Greece is just another sovereign state.


As to the “turbulence”, the jury is still out cf.post by Dan McLaughlin above.


Labour Market Deregulation and Productivity: IMF Finds No Link
by Ronald Janssen on 15 April 2015

New research by IMF staff has found there is no evidence that reforms that deregulate labour markets have any positive impact on increasing the economy’s growth potential. As labour market deregulation has been a key ingredient in the IMF and troika’s financial bail-out programmes in several European member states, this raises serious questions about the way the IMF itself has managed the financial crisis – particularly in Europe.

… the IMF does not find any statistically significant effects on total factor productivity that result from labour market regulation.


@ Dan

German 10 years will soon be into negative yield territory. That’s throwing away money. The longer limbo lasts, the deeper the losses. Would it not make more sense to go for a reset now? Procrastination will only cost more.
Throwing Greece overboard won’t make any difference on the upside either.

Negative yields are probably the most significant development. The FT has been spinning valiantly about good deflation but there seems to be a lot of negativity in the bond market that is justified.

The Greek dance will go to the wire. And end in a deal. The macro backdrop is too fragile to throw Greece to the dogs. UK hung parliament and a bad set of non farm numbers stateside could get the VIX going again.

From AEP, an utterly succinct statement of why Varoufakis should refuse to play “Croppy lie down” to the Elector of Brandenburg:

Mr Schauble admitted that the EU-IMF Troika measures may never restore Greece to solvency, dismissing it as a “problem for future decades”.

Financial stability?

Normally FS would require stabilising the ship and then concentrating of debt reduction.

My tuppence to increase stability would be

1). Banning of Bank Mega mergers. Mega mergers are bad, especially when mega banks in Asia, USA, BRics and Europe start competing to out do each other with deposits guaranteed by the taxpayers.
2). Deposit taking retail banks to be separated from ownership of securities broker dealers and investment banks, again to prevent deposits which are state guaranteed from being frittered away in de casino of the markets.
3). Derivatives should not be used by banks to obfuscate and distort balance sheets, subvert regulations, game the system, artificially boost profitability and executives bonuses. Greater clarity / regulation of derivatives market?
4). Banks should be kept small enough so that they cannot become so intertwined with major firms around the world that they cannot be allowed to fail, like AIG insurance. If the financial threat of failure is removed, banks can be inclined to take more risks safe in de knowledge they will get bailed out.
5). Financial regulation requires to unified enough to keep tabs on mega banks.
6). Bankers should not have access to political seats of power via lobbyists in London, Frankfurt or Wall St, Nor have the ear of policy makers.
Various acts which have been repealed in the past ( Glass Steagal 1933 act ) should be re implemented
7). If Modern finance can only be understood by Academics, Nobel Prize Winners and high up Bankers then something is clearly wrong, this group require serious regulation as their failure can present grave instability to a country’s economy.
8). I believe the Irish Govt still own 10% of BoI, perhaps that figure should be mandatory for all banks in each euro zone nation, just to let the bankers know they will be held accountable, the state is still there watching.

Needless to say with the exception of point 8, there is probably a snowballs chance in hell of the first 7 points getting Implemented.

@ Sporthog

After the next crash, that list will be feasible. The strange death of liberal England or Wealth and Democracy would be a good place to find historical precedents because history repeats itself. Joseph Chamberlain in the 1910s observed that the shift to finance involved an undependable economics, not genuine wealth creation. And he was a Tory.

British workers launched a wave of strikes between 1910 and 1914 and “pushed aside moderate leaders to speak in a new idiom of distrust, socialism and confrontation” per Kevin Phillips. Brideshead didn’t make it.

Finance goes too far in rent seeking and this gilded age is as bad as any of them. Very little value is created. It’s all EPS scams and bonuses for betting with the Fed/ECB put.

And very little growth with mounting political instability.
Throw in climate change for dessert.

Another good Wealth and Democracy quote “In searching for what was common to 21 past civilisations that failed, Arnold J Toynbee identified concentrated ownership and the inflexibility of elites in dealing with it”

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