Greece did it, and sanctioned by the EU. They cut their deficit by 100 billion euro by decree, by what was called ‘private sector involvement’ which was, functionally, a bond tax.

Instead of another 100 billion of public sector service cuts and tax hikes on the population, they just taxed the holders of Greek bonds. And ostensibly nothing ‘bad’ happened, apart from a few banks changing a few numbers down on their books. Nor did the euro go down or inflation go up or anything else ‘monetary’ go wrong.

Pretty tempting for a new socialist govt in any euro member nation?
No more austerity, just a bond tax instead?
If Greece doesn’t have to pay, why do we?

But, so far, not a word from any of them.
The silence is deafening.
The risk very real.

11 Responses

  1. You recently posted an article showing support for austerity among the German population.
    In Greece and France the election results clearly point in the other direction.

    Although,….. mr Hollande clearly said that …’of course the deficits have to go down to keep the debt under control’.
    Looks he just wants to divide the austerity pain a bit different.
    He seems to be determined to continue with the unilateral financial transaction tax per coming August.
    Dividends to foreign shareholders will also be taxed extra.
    Won’t surprise me that soon traders will take those french stocks from their screen.

  2. It’s a tax on private sector savings; will thius make savers hunker down even more? But on the other, if the debt problem is “cured” and austerity ends, will this make people end govt. sector contraction and open up people’s spending? Are there opposing forces at work here as effectively “the rich” are taxed to bring budgets back into balance?

    Not as effective as ECB transfers to member states, of course.

    1. yes, lose your investment and you might cut your spending.
      yes, if the debt problem is cured and they run it up again. but that’s way down the road

  3. You would think that by now they have become aware that each member state individually is maybe not monetarily sovereign, but as a group they are.
    In other words they have the ability to pay. The ECB can clear any payment instruction of any member state as long as they agree collectively (at least by majority).

    Regularly I read that certain MMT people say that the euro is a State-less currency and that member states are like third world countries that use and borrow in a foreign currency.
    It seems to me that the fact that above mentioned monetary sovereignty is ultimately within the group is quite different from the position of third world countries using foreign currencies.

    As far as I remember Draghi last week said that if the goal is a fiscal union then the starting point should not be a transfer union, but the mutually agreed discipline.
    Klaas Knot (Dutch central bank) recently openly supported euro bonds, but only after installation of a European watchdog to enforce agreed discipline.
    I think that the solidarity for necessary transfers is there, but the ‘negotiations’ go very slow and very tough.

      1. @WARREN MOSLER, That is true, but the ECB is owned by the member states, so ultimately there is the potential to change existing arrangements.
        Third world countries that use e.g. USD have zero control over the FED or US in general.

      2. @walter,

        one of Hollande’s ideas is to allow (force?) the ECB to lend directly to EZ national governments.

        Unlikely to go past Germany’s veto though.

        And what would that make the ECB?

        If the ECB is only allowed to lend directly to governments then it makes it the de-facto fiscal authority, equivalent to granting budgets to national governments. I don’t think that it is politically realistic.

        If the ECB is forced to lend to national governments, then what’s to stop a country from spending too much so its population can import like crazy (intra EZ), forcing other EZ countries to pay for it?

        I think break-up of the EZ is probably a more realistic and fairer solution, despite the fact that the Euro is the only thing, with Schengen, that makes Europeans actually feel European.

      3. You have to remember that the ECB is a joint venture of the National Central Banks.

        And those National Central Banks are still owned and directed by the government they are in.

        For all its bluster the ECB is just a clearing house for the NCBs – via an uncollateralised overdraft system.

        So if Hollande fails to get the ECB to fund all governments, Hollande could get the Banque de France to do the job just for France.

        The ECB then has to accommodate that or watch the Euro clearing system shatter.

      4. @walter,

        The ECB could fund government deficits, but it cannot do it nilly-willy to avoid a race to deficit spending between member countries. That’s why the 3% rule was necessary.

        One way around this problem could be the ECB funding those deficits at different rates depending on the deficit levels for the next 5 years or so, e.g.
        1% if deficit < 3%
        3% if 3% <= deficit < 5%
        5% if 5% <= deficit = 10%
        And adding other conditions like inflation as necessary.

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