7 May 2012

A New Dawn for Europe?

François Hollande has just been elected the next French President. And Greek voters have voted clearly against the parties who signed up for the EU/ECB/IMF austerity package. Could this be the dawn of a new chance for Europe? I sincerely hope so.

Hollande has made it clear that he wants a change to Europe's strategy of austerity. He wants a policy for growth. How might this work?

In my recent Youtube presentation "Solving the Debt Crisis", I have argued that Central Banks should be forced to lend governments the money they need to pay off their entire national debts towards the financial sector - debts that had reached €10.4 trillion for the 27 European countires. Those debts cost tax payers €370.8 billion in interest payments to the banks in 2011 alone - and an incredible €5.6 trillion in the period since 1995.

Paying interest on loans could be justified if the banks that lent the €10.4 trillion actually had the money they lent. But since it is now clear that they just created the money out of thin air, it surely has to be seen as the biggest scam in the history of the planet. And it has to stop.

In my presentation, I talked about one option in which the ECB lends the governments the money they need to pay off the debt, who would then pay off the money at low interest rates over a reasonably long period - say 10 years. This is certainly the simplest solution to get passed.

But as I noted when talking about the UK, which has its own central bank, it is far from clear that there is really a need to pay the central bank back the money. After all, the central bank didn't actually have the money.

The more I think about it, the more I am convinced that we should be going further. Specifically, the ECB should generate the money needed to cancel the debt without requiring the 17 Eurozone countries to pay the loans back.  Lets have another look at the numbers for the Eurozone countries (the figures have all been compiled from the ECB and Eurostat websites).

The ECB could generate the  €8.2 trillion needed to cancel the debts of all 17 countries. This would save Eurozone taxpayers the €286 billion that they paid in interest to the banks in 2011 - 3.0% of their GDP. The savings will be even more significant in the future, because the interest payments based on the latest interest rates provided by the ECB website will reach €373 billion a year - see the last column.

In principle, the banks should be delighted - they have just received an injection of €8.2 trillion. But of course, the problem is that they will have been "paid" with the same sort of fictive "money" that they lent the goverenments in the first place. That sort of "money" disappears in a puff of smoke when it gets paid off. They can't do anything with the money - which is good because it means that there will be no inflation. But of course the worst thing for the banks is that they will no longer get the hundreds of billions a year in interest payments that they have become used to. The gravy train will be off the rails for good. And you can expect extremely strong resistance.

But the next question concern whether or not the governments should pay back the ECB. For me, there is actually no reason to do this. But there are two scenarios.

In the first option, the €8.2 trillion is given to the governments and the ECB says, "No problem, don't bother paying us back". As I pointed out, this is actually not unreasonable given that the ECB doesn't actually have the money that it lends, so why should they get the money back?

Obviously, this means that some countries might be thought to get a better deal than others. In particular, I can hear some people in Germany saying that the Greeks should not be allowed to get away with it. Some will say that they don't deserve to be helped. But the fact is that it is the Germans who would get the biggest cheque - nearly €2.1 trillion. Surely, this should make them realize that it is in their interest too  - they would save the €67.7 billion in interest paid in 2011 to the banks.

If there is resistance of this sort, there is always the second option. In this version, the ECB only donates enough money to pay off the part of the national debt that corresponds to 60% of each countries GDP - the limit that countries were supposed to respect when they signed the Maastrict treaty. As you can see from the table, only 4 of the Eurozone countries are below this number - Finland, Slovenia, Slovakia and Luxembourg. But all the other countries have gone over their limits - including Germany who are currently at 83%.

Thus, the ECB could "donate" up to 60% of GDP to pay off the debt, and the rest of the money would only be loaned. This would mean that the countries who had been more frugal would keep their advantage. But even in this scenario, the interest rates and the repayment periods for the other countries could be very low (less that 1%) and long - ten years or more.

For me, either option is fine. The critical point is that we will have broken the strangle hold that the markets and the ratings agencies have over Europe's governments. Currently, the financial sector can effectively blackmail governments into stripping out public services and handing them over to private industry. If you don't, then we will double your interest payments. It is a strategy that has been working well in the UK, where Osborne has been able to claim that the destruction of the public sector is somehow justified by the relatively low interest payments that the UK pays. My proposals will put an end to this blackmail.


  1. Dbm5

    When the ECB creates "money" that is used exclusively to pay off debt, then it is difficult to see how it could cause any inflation. Remember that the money that the commercial banks lent to the governments was virtually all created out of thin air when the loans are made. As a consequence, when they are paid off, the "money" disappears in a puff of smoke.  The banks would not be able to spend the money they receive, although the move would vastly improve their accounts.

    So, no, this would not cause inflation. It would (a) save european taxpayers hundreds of billions a year in interest charges, and (b) reduce bank exposure to debt. Both aspects are highly desirable.