A Euro Treasury? An Interview with Jörg Bibow

(The following is the translation of an interview that appeared in Sunday’s Eleftherotypia. C. J. Polychroniou talks to Jörg Bibow about the latter’s proposal for a Euro Treasury and how it represents a viable solution to the eurozone crisis — a crisis that is very much ongoing, Bibow explains.)

CJP: A number of economists, including yourself, maintain that the eurozone crisis remains unresolved, yet the financial markets are calm. Is this a case of seeing the glass half empty rather than half full?

JB: Sure, if you are a believer in the efficient market theory you might conclude that things are just fine. Well, I don’t. Does anyone remember that the markets were also in a state of bliss in the years leading up to the crises in the US and Europe? As serious economists such as Keynes and Minsky well understood, financial markets are subject to conventional behavior and prone to instability. The current convention appears to be that Mr. Draghi’s famous “whatever it takes” promise is insurance enough that really bad stuff is not going to happen. Fine, but how powerful is Mr. Draghi, really? At some point the markets might wake up and wonder what it would actually take to fix the situation and how Mr. Draghi might possibly deliver on that. Complacency can turn into another full-blown scare in no time. And the reason to be scared is the fact that the euro is still not on any sound footing. Serious regime flaws are still in place. The eurozone economy may have stopped shrinking, largely owing to growth in the rest of the world, but that alone does not fill up the glass. Unemployment is stuck at mind-bogglingly high levels. Indebtedness continues rising. Prospects for any real recovery are grim. Ultimately, what will convince countries to stay with the euro as the euro comes to symbolize impoverishment rather than prosperity?

CJP: Many critics of the current eurozone architecture maintain that a transfer union is the only way to address imbalances and keep the euro alive. What you have proposed, however, is a “Euro Treasury” scheme which is designed not to be a transfer union. First, what’s wrong with having a transfer union?

JB: A transfer union features more or less automatic support from currently richer and stronger members to partners that are currently poorer and weaker. An element of transfer union was part of the EU and euro project from the beginning, the EU structural and cohesion funds. The US monetary union includes a far more extensive transfer union than that to be sure. Unfortunately, the euro crisis has greatly increased resistance against moving in that direction. Moreover, the troika rescue programs are erroneously interpreted as transfers – when in fact they were bailouts of creditor countries’ banks and meant more debts rather than any gifts for euro crisis countries, allegedly the beneficiaries. I see nothing wrong with a US-style transfer union for Europe in the long run. My “Euro Treasury” plan simply acknowledges that that is not a short-run option. Therefore, my Euro Treasury would pool fiscal resources and issue common euro bonds. But the benefits would be equally spread, with no transfers from rich to poor.

CJP: Exactly, how would the Euro Treasury work?

JB: Put simply, the proposed Euro Treasury would issue common euro bonds to fund public investment in the euro area. The Euro Treasury would give investment grants to the member states based on countries’ respective GDP shares, and it would raise tax revenues to service the interest on the common euro bonds also based on countries’ GDP shares. There would be pooling without redistribution. There would be a common capital budget at the center whereas member countries would henceforth be obliged to balance their (structural) current budgets. The capital budget could be set at, say, 3 percent of GDP and grow at, say, 5 percent annually. This would be Europe’s commitment to steadily invest in its common future – about which there is much cheap talk but rather perverse austerity action. For currently we are burdening our grandchildren with a decaying infrastructure and human capital stock. Some of the Euro Treasury plan’s implications may not be obvious at first: a boost to public investment would be the common recovery program, while the euro bonds issued to fund the program would be the basis for common financial conditions across the currency union.

CJP: And how would the Euro Treasury deal with the current massive loads of debt accumulated in the peripheral countries?

JB: Dealing with the debt legacies directly involves fiscal transfers. If you can manage to overcome resistance against transfers, fine with me. My starting point was to come up with a plan that can do a lot of good even if transfers are not part of it. Help regarding the debt legacies would arise indirectly though. The point is that while area-wide austerity can only make the debt situation worse, by replacing austerity with a common fiscal stimulus, the investment program, run and funded from the center by the Euro Treasury, will finally enable the member states to balance their (structural) current budgets and reduce their national indebtedness. The long-run outcome would be similar to the US situation, with public debt at the state level in the 10 percent of GDP ballpark.

CJP: Why should Germany and other core nations warm up to this scheme?

JB: Note that the Euro Treasury does not mutualize old national debts, against which there is insurmountable resistance. The plan is forward looking: to issue new common debts to fund the new public investment that is the basis of Europe’s common future. Like everyone else, Germany has a lot to gain from a euro that actually delivers on prosperity for all, while Germany in particular has also a lot to lose in case of euro breakup. In that case Germany could write off much of its large net foreign asset position. And Germany would see its super-competitiveness being wiped out over night, with unemployment and public debt surging as Germany becomes the new euro crisis country. Surely, Germany should love the Euro Treasury plan. Also, since it features the “golden rule of public finance” which was part of Germany’s constitution until not so long ago. So let’s create a proper “stability union” that actually deserves that title!

CJP: And if they don’t?

JB: I am unsure about timing, but without fundamental policy changes along the above Euro Treasury lines I consider eventual euro breakup as inevitable. The current state of denial and delusion is truly scary.