A New Modest Proposal for the Euro Crisis

Yanis Varoufakis and Stuart Holland have come out with a new version of their “Modest Proposal” for resolving the euro crisis (an earlier version of the Proposal appeared as a Levy Institute policy note in 2011). The latest iteration (4.0) adds a new co-author in James Galbraith and an additional “sub-crisis” to the original three: the eurozone, they say, faces a banking crisis, a public debt crisis, a crisis of under-investment, and now, after five years of policy failure (due in part to treating the situation as only a debt crisis) Europe faces a social crisis.

The “modesty” of the authors’ policy approach hinges on avoiding what they describe as a false choice between “draconian austerity and a federal Europe.” They argue that we can make substantial progress on addressing these multiple crises without resorting to things like national guarantees, fiscal transfers, or treaty changes. For instance, here is the outline of their proposal for dealing with sovereign debt:

The Maastricht Treaty permits each European member-state to issue sovereign debt up to 60% of GDP. Since the crisis of 2008, most Eurozone member-states have exceeded this limit. We propose that the ECB offer member-states the opportunity of a debt conversion for their Maastricht Compliant Debt (MCD), while the national shares of the converted debt would continue to be serviced separately by each member-state.

The ECB, faithful to the non-monetisation constraint (a) above, would not seek to buy or guarantee sovereign MCD debt directly or indirectly. Instead it would act as a go-between, mediating between investors and member-states. In effect, the ECB would orchestrate a conversion servicing loan for the MCD, for the purposes of redeeming those bonds upon maturity.