Greek debt a better alternative is possible:ECB needs to buy 100 billion Euros of Greek sovereign debt +temporarily expand M2 by 1.15 %

The situation in Greece continues to fester as wrangling continues as to the precise terms and the degree of severe austerity demanded by the EU troika that has been negotiating the bailout.

Although precise data is difficult to obtain it would appear from a column by Gavyn Davies in the FT today that the bailout involves transferring some 100 billion euros worth of Greek debt from the European private banking system to the accounts of the IMF and the European union. These accounts, unlike those of the private banks, at least in theory, are the liabilities of taxpayers as opposed to bank shareholders and bank bondholders.

It is because of this and the political considerations of the German, Dutch and Finnish politicians involved in the negotiations that such draconian austerity is being demanded and apparently some German politicians like the German finance minister Wolfgang Schauble are now having serious second thoughts about rescuing Greece and are increasingly considering default as an option. Default is of course always an option. If it were not for the fact that some 40 plus European banks and various governmental agencies would be affected, and the extent of the damage would only become known if and when the default were to occur, and a raft of speculators would make money out of their credit default swaps which essentially bet on a default, it might be a useful option for Greece to consider. It would allow it to reduce its debt load to more reasonable levels and launch a new drachma currency, thereby avoiding some of the extremely damaging deflation being imposed on it by its creditors.

But there is another better way out of the mess.

It is a route currently blocked by the monetarist dogma that still grips the European central bank and the leading Eurozone politicians from Germany. That better alternative would authorize the ECB to purchase a large block of Greek sovereign debt , suspend the market interest payments on it for a set period of time by reducing the interest rate to close to zero and undertake the operation by temporarily expanding the broadly defined money stock M2 which as of December 2011 stood at 8673.2 billion Euros. Hence, an additional 100 billion would add 1.16 % to M2 and clearly in the present circumstances have no inflationary consequences. This amount of debt relief with interest rates near zero and stripped of the obligation to impose immediate punishing and counter productive austerity that can only shrink aggregate demand and undermine debt repayment and reduction by increasing unemployment is clearly a superior alternative policy to the one being followed.

There is some moral hazard involved and Greek politicians and citizens would still have to clean up their act in terms of paying their taxes, restoring a solid work ethic and manageable and affordable welfare state but at least that could be undertaken in more civilized circumstances than now prevail and the much beleaguered Greek citizenry would be granted some breathing room.

All that stands in the way of this option is hidebound conservative rigidity and dogmatic misguided monetarist thinking that the events of the last few years should have long ago vanquished.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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