“”The backstop package for Greece and the ECB’s climb-down on its collateral rules set a bad precedent for other euro area states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness, and higher inflationary pressures over time,” said Joachim Fels, head of research, in a note to clients.””

I agree with the moral hazard theory, however I would counter by saying market is making it in practice impossible (even with backstops and colateral climbdown) for this endgame to occur given the cost/lack of funding it is offering to profligate states??

Yes, under current, limited thinking.

My proposal for the ECB to make an annual payment to each national gov. of 5% of total eurozone gdp on a per capita basis still looks to me as the only proposal that instantly repairs credit concerns and gets to all the problematic issues.

However there is no reason to not quadruple that original proposal to a 20% annual distribution.

Additionally, any nation not in compliance with ‘growth and stability’ requirements would risk losing its annual payment.

This would ensure that national debt to gdp ratios will fall for all member nations who comply with the rules.

It also means any nation who doesn’t comply with the rules risks losing its payment and will be ‘punished’ by markets
while nations in compliance getting their annual 20% payment will be secure in their ability to fund themselves.

Over time the 20% annual payment can be scaled down until it equals their self imposed rules for permissible annual deficits for the member nations as desired.

The 20% annual distribution does not foster increased government deficit spending, apart from removing the ramifications of default and risk of default. In contrast, it provides a powerful incentive to limit national govt deficits to desired levels.

This proposal dramatically strengthens the finances of the eurozone with incentives that are the reverse of what are called ‘moral hazard’ incentives.

This proposal is not yet even a consideration so until then anything short of a dramatic export boom where the rest of the world is willing to reduce its ‘savings’ of euro net financial assets by net spending on eurozone goods and services isn’t going to cut it.

>   (email exchange)
>   On Fri, Apr 16, 2010 at 7:44 AM, wrote:
>   Talked to an ECB guy about this proposal. He says ECB will NEVER agree. Says they can’t
>   by law do what you are proposing as he claims it is “monetising” the debt and will be
>   ”inflationary”.

That’s what happens when no one in charge and no one in the medial understands actual monetary operations.

>   Down we go!

6 Responses

    1. Its a good quiz problem to work out all the accounting 🙂 Will Bundesbank start with a peg to the Euro if Germany does that ?

  1. Dear Warren,

    The Growth and Stability pact limits the ability of memeber states to public deficit spend! Returning to this type of “fiscal discipline” desnt violate the premise of MMT deficit spending to compensate for private sector demand shortfall? Using the ECB hand outs for public debt repayment will not deal with the private sector accumulating more private debt like in tha US. are you saying something else?

  2. agreed, but what i’m saying is my proposal will allow them to use the stability and growth pact to keep deficits at desired levels while maintaining credit worthiness and without moral hazard.

    the fact that their desired levels may be too low is another story, and i very much agree that 3% annual deficit caps is counter productive.

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