Thursday November 27, 2014 Search
Weather | Athens
12o C
9o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
A cheap moratorium on the stigma of eurozone debt

By Thomas Colignatus*

The EU is in a pressure cooker with interest rates that suffer from stigma, i.e. irrational fears of default that become rational and self-fulfilling because higher rates of interest imply a reward. A moratorium is one way to ease the pressure, by temporarily allowing eurozone bonds for 3 percent of GDP per annum to cover deficits. This would buy time to think through a structural solution, as a dash for a fiscal and political federation may be ill-advised given the risk of resentment.

Decision-making in the EU is currently taking place in a pressure-cooker environment, creating the risk of wrong decisions that would only make the situation worse. In the past five years, EU leaders have wandered from one crisis to the other -- created in part by themselves. Now, for example, they recognize that the «voluntary default» on Greek debt was not so wise. Last week, German Chancellor Angela Merkel expressed her preference for a fiscal and political federation, though that carries risks too. The transfer of national sovereignty taking place under the current conditions of austerity and depression in southern Europe, could render the European project a diktat disliked by Europeans instead of a community that everyone welcomes. Historically Europe’s greatest danger is resentment, and such a federation may not be what is needed just now.

Current high rates of interest derive from the stigma and the key problem in the eurozone is that there is no structural mechanism yet to eliminate it and problems with interest rates are too weak an argument for a political federation.

There is a straightforward way to buy precious time to discuss structural reform with some ease: allow eurozone members to borrow 3% of GDP per annum, for the next 10 years, with full backing by the ECB. Since old debt is already in the hands of market counterparts it is not really as relevant, and only new deficits are important for the annual budgets of the member states. With the backing of the ECB the rates of interest in the eurozone could drop to an acceptable low level. Italy, Spain, Portugal and Ireland would be immediately saved and we would get a clearer picture of what can be done about Greece. After those 10 years only 30% of their GDP will be have such backing by the ECB, so that coverage would be limited and the «no bailout» condition still satisfied.

This moratorium would use euro bonds. Proponents of euro bonds generally want them structurally and not just for a moratorium. Earlier I advised against such bonds since they destroy important market information. For the purposes of this moratorium they could, however, form an instrument that everyone understands and that is immediately effective. My own structural analysis leads to the suggestion of a regime ladder, with different stages depending upon the distance from the target of 60% of debt to GDP. However, my structural analysis is only one of the many approaches. The idea of the moratorium is to create more time to evaluate all of them, also using what we have learned about how a crisis can evolve.

There is a moral hazard that some member states would take advantage of such a moratorium and not participate in the creation of a structural solution. It is more likely, however, that the whole of Europe has become more aware of the need for a structural solution. Nevertheless it would be possible to define phases, say one year for job-creation and agenda-setting, and subsequently three periods of three years for other aspects to be developed in full -- say on investments, banks, governance -- and a unanimous decision to be reached on whether there is sufficient progress to continue with the moratorium.

This proposed moratorium would come at a cost for Germany and Holland, as their interest rates are exceptionally low because of fears about southern Europe. Europe as a whole could ask Germany and Holland to accept normal rates of interest again to create this moratorium. Given Chancellor Merkel’s objectives and given that the «no bailout» clause is satisfied, it would be a wise decision and the best news that Europeans have heard since all this started in August 2007.

----------

* Thomas Colignatus is a Dutch econometrician.

ekathimerini.com , Tuesday Jan 31, 2012 (20:08)  
Beware of the fallen idols
The hard truth
Extremism from a bygone era
No call for more games
Hundreds of migrants on crippled ship off Crete
Ships from Greece rushed to help after a crippled freighter crammed with hundreds of migrants floundered for hours Tuesday in gale-force winds and high waves in the Mediterranean Sea, offici...
Policemen suspected of working at Piraeus bar where shooting took place
At least three serving policemen are thought to have been working at the bar in Mikrolimano, Piraeus, where a 31-year-old man opened fire with an AK-47 early on Saturday, resulting in 15 peo...
Inside News
Debtors snap up offer for easier settlements
The government’s plan for the settlement debts to the state is paying off as Greeks are signing up in numbers for the more favorable payment scheme. In less than 24 hours since the opening o...
Belgium gas firm said to be eyeing DESFA
Belgian natural gas network operator Fluxys is said to be eyeing the Greek gas grid, after signing an agreement on Monday with its Greek counterpart (DESFA) for the drafting of a study on th...
Inside Business
SOCCER
Atletico eyes last 16 berth against Olympiakos
Greek champion Olympiakos faces a tough task if it is to prevent last season's beaten finalist Atletico Madrid sealing its passage into the last 16 of the Champions League at the Vicente Cal...
SOCCER
EPO ends soccer suspension, Super League resumes
Soccer action will resume this weekend after the Super League convened on Monday, elected a new president and alternate president and sent a letter to the soccer federation that assures it t...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Hundreds of migrants on crippled ship off Crete
2. Atletico eyes last 16 berth against Olympiakos
3. Debtors snap up offer for easier settlements
4. Belgium gas firm said to be eyeing DESFA
5. OLP approval paves way for investment in Piraeus
6. Airport tender exceeds expectations
more news
Today
This Week
1. Anastasiades to undergo heart surgery in the US on Dec 4
2. Cargo vessel carrying hundreds of migrants adrift southeast of Crete
3. Two police officers among 9 arrested for drug trafficking
4. Trade deficit widens by 8.7 percent during Jan-Sept period, says ELSTAT report
5. Fraport, Copelouzos offer highest bid for Greek regional airports
6. Stop Mediterranean becoming vast migrant cemetery, Pope tells Europe
Today
This Week
1. Give Greece a chance
2. Biden heads to Istanbul amid tension over Cyprus EEZ violation
3. Scientists expand excavation of ancient Amphipolis
4. Extremism from a bygone era
5. Piraeus nightclub shooting leaves 3 seriously injured
6. Cosco’s Greek unit adds multinational rail-freight client
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.