Research Topics

How a Five-year Suspension of the Debt Burden Could Overthrow Austerity

The present study puts forward a plan for solving the sovereign debt crisis in the euro area (EA) in line with the interests of the working classes and the social majority. Our main strategy is for the European Central Bank (ECB) to acquire a significant part of the outstanding sovereign debt (at market prices) of the countries in the EA and convert it to zero-coupon bonds. No transfers will take place between individual states; taxpayers in any EA country will not be involved in the debt restructuring of any foreign eurozone country. Debt will not be forgiven: individual states will agree to buy it back from the ECB in the future when the ratio of sovereign debt to GDP has fallen to 20 percent. The sterilization costs for the ECB are manageable. This model of an unconventional monetary intervention would give progressive governments in the EA the necessary basis for developing social and welfare policies to the benefit of the working classes. It would reverse present-day policy priorities and replace the neoliberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis. The perspective taken here favors social justice and coherence, having as its priority the social needs and the interests of the working majority.

In a policy note published last year by the Levy Institute, Philip Pilkington and Warren Mosler argued that the eurozone sovereign debt crisis could be solved by national governments without the assistance of the European Central Bank (ECB) and without their leaving the currency union, through the issuance of a proposed financial innovation called “tax-backed bonds.” These bonds would be similar to standard government bonds except that, should the country issuing the bonds not make its payments, the tax-backed bonds would be acceptable to make tax payments within the country in question, and would continue to earn interest.

In the current policy note, Pilkington examines the continued relevance of the bond proposal in light of changes that have taken place with respect to ECB policy since the original proposal was made, as well as the case made by Ireland’s finance minister that tax-backed bonds would violate current Irish law (and, by implication, the law in other eurozone countries). He also outlines some changes made to the initial proposal in response to constructive criticisms received since its publication, and briefly notes another area in which the proposal might be utilized—outside the eurozone. His conclusion? That tax-backed bonds remain a valid policy tool, one that can be implemented at the national rather than at the federal level, and a stepping stone to solving the eurozone’s economic problems.

A Critique of the German Debt Brake from a Post-Keynesian Perspective

The German debt brake is often regarded as a great success story, and has therefore served as a role model for the Euro area and its fiscal compact. In this paper we fundamentally criticize the debt brake. We show that (1) it suffers from serious shortcomings, and its success is far from certain even from a mainstream point of view; (2) from a Post-Keynesian perspective, it completely neglects the requirements for fiscal policies of member-countries in a currency union and will prevent fiscal policy from contributing to the necessary rebalancing in the Euro area; and (3) alternative scenarios, which could avoid the deflationary pressures of the German debt brake on domestic demand and contribute to internally rebalancing the Euro area, are extremely unlikely, as they would have to rely on unrealistic shifts in the functional income distribution and/or investment and savings behavior in Germany.

The root of Europe’s sovereign debt crisis can be found in the fact that investors are concerned that countries in the periphery might default, causing them to demand a higher yield on government bonds. What’s needed is a way of giving peripheral debt a high degree of safety while allowing peripheral countries to remain users of the euro.   A simple solution to this problem would be for peripheral countries to begin issuing a new type of government debt: the “tax-backed bond.” Tax-backed bonds would be similar to current government bonds except that they would contain a clause stating that if the country failed to make its payments when due—and only if this happens—the bonds would be acceptable to make tax payments within the country in question. This tax backing would set an absolute floor below which the value of the asset could not fall, assuring investors that the bond is always “money good,” leading to lower bond rates and thus ensuring that peripheral countries would not be driven to default.

Some Remarks on the Current Stability Programs, 2011–14

This paper evaluates whether the 2011 national stability programs (SPs) of the euro area countries are instrumental in achieving economic stability in the European Monetary Union (EMU). In particular, we analyze how the SPs address the double challenge of public deficits and external imbalances. Our analysis rests, first, on the accounting identities of the public, private, and foreign financial balances; and second, on the consideration of all SPs at once rather than separately. We find that conclusions are optimistic regarding GDP growth and fiscal consolidation, while current account rebalancing is neglected. The current SPs reach these conclusions by assuming strong global export markets, entrenched current account imbalances within the EMU as well as the deterioration of private financial balances in the current account deficit countries. By means of our simulations we conclude, on the one hand, that the failure of favorable global macroeconomic developments to materialize may lead to the opposite of the desired stability by exacerbating imbalances in the euro area. On the other hand, given symmetric efforts at rebalancing, the simulation suggests that for surplus countries that reduce their current account, a more expansionary fiscal policy will likely be required to maintain growth rates.