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You talk symbolic brain, Varoufakis talks Semiotics versus hard facts
During the first part of 2010, culminating in the May `bail out' for Greece, Europe decided: (a) to remain in denial about the poor health of its banking sector, (b) to treat Greece's insolvency as a liquidity crisis and (c) to prescribe austerity measures that deepened and widened the ensuing debt crisis.

Since then developments have made it abundantly clear that this is a course to nowhere. Predictably, the Greek crisis got worse not because the medicine was badly, or insufficiently, applied but because (a) it was toxic and (b) it had awful side-effects on Europe's ailing banking sector.

...

The time to stop dithering has come. First, Europe needs to recapitalise its banks. Secondly, it needs to unify the Maastricht-compliant part of eurozone's debt (through the introduction of a homogenous eurobond). Finally, we need a new pan-European investment spree (via the European Investment Bank). Then and only then will the `Greek' problem be reduced to an order of magnitude in concert with my country's actual size.

This is an english version of an article in Die Zeit published yesterday in German. A month ago, Varoufakis had published Article in Die Zeit, promoting the Modest Proposal
Is there an alternative? Absolutely! Consider the following three-step policy that attacks all manifestations of the crisis head on:

1. Use the funds raised by the European Financial Stability Mechanism (EFSF) to recapitalise the eurozone's (almost insolvent) banks in exchange for shares in these banks. Once the banks are cleansed, they will no longer need to rely on massive liquidity injections from the ECB (and can even be asked to take a selective haircut on bonds from the periphery). The EFSF then sells the shares and recoups its funds, thus costing the German taxpayer nothing (much like the TARP scheme in the USA).

2. A conversion loan is organised by the ECB for the part of the debts of member-states which does not exceed the EU's Maastricht limits (60% of GDP). In brief, the ECB takes on its books forthwith a tranche of the sovereign debt (of all member states that request it) equal in face value up to (the Maastricht-compliant) 60% of GDP and finances this by issuing eurobonds that are its own liability. Naturally, the member-states continue to service their debts (to the ECB now) but at the lower rates (and with the longer maturity) secured by the eurobond issue.

3. Empower the European Investment Bank (EIB) to fund a large scale investment program by which permanently to counter the forces of recession in peripheries that keep dragging the rest of the currency union (including parts of German society) toward stagnation. How can this happen? By allowing for the 50% of project funding (which now the bankrupt member-states must raise!) to come from the ECB's net eurobond issues.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 07:22:24 AM EST
Now, this is all very fine and dandy. But what are the possibilities of these proposals happening?

Are they politically feasible?

I think some, shall we say, "risk assessment" should be done here. If the EU continues muddling through its current path (or something similar), what might happen?

I speculate that the "muddling through" will continue up to a point where things will simply start to break down disorderly.

Me thinks that "disorderly breakdown" should be discussed. And that people should prepare for it (even on a personal basis).

by cagatacos on Fri Jun 17th, 2011 at 07:35:25 AM EST
[ Parent ]
This being said, it seems that Germany might be waking up a bit...
by cagatacos on Fri Jun 17th, 2011 at 07:37:18 AM EST
[ Parent ]
Varoufakis is also right about another thing. he says there is no chance now for this option to succeed.. but just wait a couple of years more... with the same situation... maybe someone would listen then.

It seems that Germany gives the green light to the bail out of the European banks via Greece, now it is time to see if Greece accepts.. but the point is, this exact situation will be repeated next year.. or earlier...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Jun 17th, 2011 at 08:10:04 AM EST
[ Parent ]
Why wouldn't Greece accept? A reduction of the 15% of the budget that now goes to service debt would be most welcomed in Greece. Even in a disorderly default scenario, Greece would still be on the hook for at least 60% debt to GDP, if not much more.

One thing protects Greece in all this mess. The vulture funds can't swoop in and buy the defaulted loans because the jurisdiction for all these notes is in Greek courts. This is quite different from how vultures typically deal with defaults in Africa or Asia or even South America.

by Upstate NY on Fri Jun 17th, 2011 at 09:54:54 AM EST
[ Parent ]
I mean the austerity part of the package which will lead to a worsening debt situation in a year.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Jun 17th, 2011 at 10:10:05 AM EST
[ Parent ]
One thing protects Greece in all this mess. The vulture funds can't swoop in and buy the defaulted loans because the jurisdiction for all these notes is in Greek courts. This is quite different from how vultures typically deal with defaults in Africa or Asia or even South America.
This is actually a reason to oppose any "Eurobonds" solution which doesn't include an explicit EU-wide surplus-recycling mechanism (e.g., Varoufakis' beefed-up European Investment Bank proposal).

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 10:14:44 AM EST
[ Parent ]
Skimping on the EIB is IMHO one of the two most likely points of failure of Yanis' proposal. Public investment being such an alien concept in today's environment. The other being insufficient recapitalisation of the banks. Who knows how deep they really are in the red?
by generic on Fri Jun 17th, 2011 at 12:16:28 PM EST
[ Parent ]
After 4 years of global crisis, 2 1/2 years from Lehman, and 16 months of Greek crisis with two rounds of EU-level stress tests, you would hope they would know.

The fact that the people in charge are running around with their hair on fire as we speak does not make me too confident that they know. Or maybe they know but are in denial.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 02:41:39 AM EST
[ Parent ]

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