73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

Alternative solutions to the euro-crisis

Friday, 30 March 2012: 5:10 PM
Gerd Groezinger, Ph.D. , Institute for International Managrment, Flensburg University, Flensburg, Germany
The crisis in the Euro-zone has lead to many hitherto unknown proposals, e.g. common bonds ('eurobonds') or infinite buying of bonds by the ECB. The first topic of the paper will be a critique of these plans. It rests mostly on a recent paper written by the author for the think-tank of the German green party. Especially eurobonds will be criticised that they are not legal yet, that the question of governance is up to now without solution and that due to anticipated chain reactions the hope for an accompanying general low level of the interest rate is doubtful.

The second topic is the discussion of alternatives. Here, two proposals are advocated. The first is a forced exchange of bonds emitted by states in danger (inclusive big euro-countries like italy) into bonds with a defined low interest rate (e.g. inflation rate plus one percent) combined with the obligation of the holders to buy papers with the same low interest rates to a constantly shrinking amount till the respective country reaches the sustainable threshold of a debt-gdp-ration of 60% (‘roll-over of debt’). This leaves the countries in question with a very long time-horizon of debt-reduction without the danger of a euro-wide recession one now observes due to the forced radical saving policy of many nations. And there would be also no need for a dangerous depreciation in the books of banks since the nominal value of the bonds remain unchanged. The same holds true for the CDOs. The second proposal would be the introduction of a progressive consumption tax with a very high top tax rate for consumed income combined with the limitation of types of savings into which one could instead invest. For the time-being, only bonds of the respective home-country and of states with EFSF-credits would be allowed. Alternatively, forced bonds for wealthy households could be introduced, a financial instrument which was quite commonly used in history in times of crisis.

In any case, the re-distributional effect of the second proposal(s) should be welcomed since we observe the trend to a more unequal society in the EU-area, which may even endanger the political legitimacy of the project. And there is an additional positive externality. Conspicuous consumption provides a negative externality to others (‘neighbourhood effect’), so that a dimming-down of the spending power of the upper income brackets would be psychologically helpful for those with lower incomes.

Since this is a conceptual paper, no empirical tests are provided and the argumentation is not based on a formal model.