Everyone in Ireland, regardless of their political orientation or party-political affiliation, should be hoping Syriza wins the upcoming Greek election and forms the next government. Why? Because their proposals on public debt would be a major boost to Ireland and the Eurozone as a whole. The headline to Denis Staunton’s excellent article said it best:
‘Why Ireland should support Greek plan to write down euro-zone public debt’
Leave aside your ideological predispositions. Even Wolfgang Munchau of the Financial Times believes Syriza and Spain’s Podemos are the only parties talking sense about European debt.
Syriza is proposing a European Debt Conference – similar to the one held for Germany after World War II. And the broad proposals they will bring to the Conference are based on this this paper written by Dimitris P. Sotiropoulos, Yiannis Milios and Spyros Lapatsiora. In short:
- The European Central Bank (ECB) acquires a significant part of the outstanding sovereign debt of the Eurozone countries – reducing national debt levels to 50 percent of GDP.
- These bonds would be converted to zero coupon bonds with a 1 percent discount
- The countries will buy back the debt when the ratio of those bonds falls to 20 percent of GDP
The impact for Ireland would be dramatic. In one fell swoop our public debt would be more than halved – reduced from 108 percent of GDP to 50 percent. This would cut interest payments by approximately half, saving €3.7 billion. Imagine what we could do with that €3.7 billion every year – increase investment, improve public services, and boost social protection income (even cut taxes if that is your political perspective). Whatever, this money would constitute a major stimulus programme for Ireland.
It would have a similar effect throughout the Eurozone. All countries would benefit (with the exception of Estonia, Latvia and Luxembourg; their debt is already below 50 percent). Over €4 trillion of Eurozone debt would be removed. With the massive interest payment reductions, the Eurozone would receive a similar stimulus boost. This would be the best way to escape the looming deflationary crisis.
The authors also hold out the prospect of a further boost, by presenting a slightly different alternative scenario to the one above: interest payments would be suspended over the first five years and rolled up into the zero coupon bonds. Giving Ireland and the Eurozone a free pass on interest payments over the next five years would have an even more stimulatory and economically-galvanising effect.
The proposals are carefully crafted. First, this is not a nominal debt write-down – Governments would buy back (start paying) the debt taken by the ECB; but only when that amount reaches 20 percent of GDP. In Ireland, this means that we wouldn’t be buying back the debt until 2053 – or nearly 40 years.
Second, as it is the ECB that is buying the debt, there are no fiscal or budgetary transfers. In other words, the German, Finnish or French taxpayer would not be liable to pay off the debts of other countries. No country would be bailing out another country.
And, third, if you’re worried about inflation (personally, I would have thought this is the least of our problems), the ECB wouldn’t be printing money; they would borrow the money needed to acquire the public debt from the private sector. This would remove excess liquidity in the economy and, so, limit inflationary pressures.
This is the most politically feasible and economically progressive set of proposals brought forward on dealing with the debt crisis in Europe. Its implementation would be a major boost to Irish and Eurozone growth, employment and poverty reduction. The authors put it this way:
‘This model of an unconventional monetary intervention would give progressive governments in the [Eurozone] the necessary basis for developing social and welfare policies to the benefit of the working classes. It would . . . replace the neo-liberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis. The perspective taken here favours social justice and coherence, having as its priority the social needs and the interests of the working majority.’
Some people might complain that this isn’t a debt write-down as such. Governments would still be required to buy the debt back, even if it is decades later. Wouldn’t this just mean transferring the debt to subsequent generations? The answer is yes and no.
Yes, the nominal debt still stands even if we put it in a cupboard for a few decades. But no, it is an effective debt write-down. The proposed interest rate on the zero-coupon bonds would be below the rate of both inflation and growth. In 40 years – when Ireland would buy back the debt – the debt and interest payments would be less than a third of what it is now (in terms of percentage of GDP). This proposal allows inflation and growth to reduce the value of the debt.
A Syriza victory could begin a momentum. There will be Spanish elections this year. With Podemos topping a number of polls, a coalition with the PSOE (Socialist Party) looks to be a real prospect. Podemos has taken a similar position as Syriza on addressing Eurozone and Spanish debt.
And then there’s Ireland. We have an election by early 2016 at the latest. The issue of a European Debt Conference should become a major political issue. A new Irish government could, in addition to supporting the Syriza proposals, could bring its own proposals on banking-related debt to the Conference. For instance, it could propose that, since the ECB would be engaging in ‘unconventional monetary’ operations under these proposals, it should give special relief on the banking debt by monetising; that is, the ECB should buy out the banking related debt and destroy it (much as Anglo Not Our Debt proposed with the Anglo-Irish promissory notes). This shouldn’t be too much of an issue. Under Syriza’s proposals, the ECB would be purchasing over €4 trillion in Eurozone debt. Liquidating the banking-related debt element would cost only a fraction – €170 billion.
That’s why the European Debt Conference and the Syriza proposals should become a major political issue in Ireland. It should feature at the top of the general election agenda. All political parties should state their position on these proposals.
And Irish progressives, trade unionists and civil society activists should line up fully behind this issue. A European crisis requires a European solution. We could witness an anti-austerity domino effect – first, Syriza; then, Podemos; and then a new progressive government in Ireland. This could unite the European Left and progressive parties – from radicals, to social democrats and the Greens. This is the new European common sense.
As the authors provocatively state:
‘ . . . suspend the debt burden for five years and overthrow austerity forever.’
Victory to Syriza.
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NOTE: Readers of this blog may be familiar with Yanis Varoufakis, Professor of Economic Theory at the University of Athens (currently teach at the University of Texas, Austin). He had been a major contributor to the debate over the European crisis which I have referred to on a number of occaions. He is now a parliamentary candidate for Syriza. You can follow him on Twitter. Best of luck, Yanis.