Friday, 12 August 2011

Guest Post by Arthur Doohan: "Federalise the Debt" has become a mantra and a “meme” in recent weeks

There are many people in the world who hope that someone else can, with a few waves and strokes of an implement, make all their troubles go away. The vast majority of these people are children and they grow out of believing in fairy-godmothers and genies by the age of eight.

There is no entity that can make our sovereign debt go away, nor is there one that can assume responsibility for it.

The right to borrow money is granted to those who have demonstrated legal and economic capacity to repay it. People (investors, speculators, call them what you will) buy bonds from entities that have:
1) assets that produce an income;
2) a track record of repaying their debts;
3) are not currently overburdened with debt.

There is NO entity in the EU that matches any one of those criteria, let alone all three.

Now, we could create one but that would imply tax gathering powers granted directly to some arm of the EU, probably, the Commission because tax-gathering is the only way for sovereign or supra-national bodies to raise revenue in a reliable or efficient fashion. Other ways have been tried in the past which usually employed the legions of Rome or the divisions of the Wehrmacht but this was not only inefficient but was exactly what the EU was founded to prevent.

Further, such a debt-management body would not have a track record of repayment and would probably be seen as being overburdened with debt and so would worsen the situation rather than improve it.

The history of this entire crisis from American sub-prime mortgages onwards has been one of the commingling of good debt risks with bad ones to the eventual and ever more rapid deterioration of both. "Gresham's Law - red in tooth and fang."

A further lumping of the good with the bad and the ugly will only make it harder for debt-buyers to distinguish good from bad. It would therefore, most likely, cause bondholders to seek a higher return or abandon the Euro altogether.

So, please, would those advocates of 'debt federalization' be so kind as to complete the circle of their prognostication and tell us what institution they see as being in charge, how much of their taxes they want to send to it, what they see happening to the yield on current debts and, lastly, how would they arrange the disbursement of new debt to the huddled masses of the EU?


Slí Eile said...

@Arhtur Notions of debt federalisation are many and varied. Mostly they centre on Eurobonds and some extended proposal to share the burden of debt at EU level. As you correctly suggest there are huge problems and obstacles to be addressed and it is not clear how this would play out. For a start only some EU Member States have a single currency - the Euro. Second, the ECB has shown itself very unwilling to budge from its current position for all sorts of reasons some of which are likely to be shaped by specific national concerns. Third, it is far from obvious that the handful of States left in the stronger (read market rated) end of the Eurozone spectrum would underpin a lender of last resort role and open-ended cheque for a new ESM. And the lack of appropriate political institutions is a huge issue. In short, the federalist approach is fraught politically and economically. And there is every likelihood - on the basis of current political orientation across EU Member States that any common approach to taxes, spending and deficit would be austere, strong on 'labour market reform' (and we know what that really means) and everything else familiar.
The challenge for progressives is to come up with solutions at both national and international level. A go-it-alone approach especially where the faustian bargain of single currency union has already been embraced over a decade ago is just as problematic and more.
However, if the currency union breaks up - which is not impossible - if we are to believe the implications of recent market turbulence - then all options are on the table including pegging to a currency such as the dollar or sterling. for now, I suggest that the strategy should be to focus on selective and, if possible, agreed default allied to European agreement on sharing part of the total debt. Anything short of that will lead to break up. It is the case that Iceland survived and went it alone to some degree. However, it involved a lot of grief for many who lost jobs, livelihoods and even homes (those who migrated). And the context was very different.

artied said...

I completely agree that carefully managed selective default is the simplest surest and fastest way to resolve our current set of problems in the Euro and wider EU area.

This is exactly what the 'OffsetDebt' proposal is designed to achieve for Ireland and it could be applied in slightly different formats elsewhere. For further me.

I also agree that the example of Iceland was in a different context....but I would argue that the context was that the Icelandic people had the self-confidence and integrity to be able to say to their bankers; "Live by the sword, die by the sword", in the full and certain knowledge that the Sun would rise the following morning and money can always be re-invented.